The Union Budget appears to have settled the ambiguity regarding service tax on rentals paid by retailers to mall developers. It has amended the definition of Renting of immovable property service to provide explicitly that the activity of renting itself is a taxable service. More importantly, the change has been given retroactive effect from June 2007. The potential negative implication for retail companies is likely to be significant.
Quick analysis suggests that the worst-case impact on Pantaloon Retail India – PRIL and Titan is likely to be ~60 bps and ~20 bps. However, Titan maintain that they have been providing for such service tax in most cases. PRIL / Future Group maintained that they have better bargaining power and they have clear contracts (in most cases) that require the mall
developers to pay service tax on rentals.
Apart from the Service Tax, the budget has also levied 10% excise tax on Titan’s sunglasses business and has increased the excise duty on watches from 8% to 10%.