HEAVY BACKLOG - Rental tax back to haunt retailers

Indian retail industry fears it will be set back by nearly Rs1,000 in backlog payments if crore in backlog payments if the government does not re- consider the service tax on rentals it has announced in the Union Budget for 2010-11.
"It will have a huge impact on the retail industry if it goes through," said Kumar Ra- jgopalan, chief executive of Retailers Association of India, which represents the indus- try.

He said the association would request the government to reconsider the pro- posal.

Then finance minister P.
Chidambaram had introduced a 12% service tax on renting of commercial space in June 2007.

But the Retailers Associa- tion went to the Delhi high court against it in 2008. Last year, the court ruled that rent- ing of commercial space does not constitute a service.

To circumvent the ruling, the government has declared in the 2010-11 Budget that the "activity of renting itself is a taxable service", and levied a 10% duty on it. It has also said the tax has to be paid with ret- rospective effect from June 2007.

Indeed, as "renting" itself has been made taxable, this could potentially affect not just retailers but firms across sectors that rent out space.

"It's going to be a signifi- cant one as we have to pay quite a lot of money," said C.B. Navalkar, chief financial officer at the country's second largest listed retailer Shop- per's Stop Ltd.

Navalkar said the tax would account for about 0.8% of the company's total revenue.
"The onus is on the landlords, but obviously they will recov- er the tax from us to pay mon- ey to the government," he added.

But India's biggest retailer, Pantaloon Retail (India) Ltd, said barring five cases, all the property lease agreements the company has signed specifi- cally mention that the land- lords would bear the tax if it is applicable.

"Wherever the agreement says the lessee has to pay, we have to provide for it," said Kishore Biyani, managing di- rector of Pantaloon. "It doesn't impact us much, but it creates disputes (with land- lords) and issues."