The Hindu Business Line : Service tax on lease, rentals to hit retailers

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Bangalore March 1 Budget 2007-08 has left retailers wondering whether their glass is half-empty or half-full. While excise duty exemptions on instant mixes, biscuits, umbrellas and footwear and a hike in personal income tax exemption limit may increase the ticket value of consumer billing, a 12.24 per cent service tax on lease and rentals on immobile property used for commercial purposes can wipe out the smile on their faces.

Mr Gibson Vedamani, CEO, Retailers Association of India, says that the country's emerging retail sector is not really `enthused' by the Budget. Most retailers have either rented or leased retail space and this forms about five per cent of their operating costs. "A service tax of 12.24 per cent on this would put pressure on their already-squeezed margins," according to Mr Vedamani.

Mr R. Subramanian, Managing Director, Subhiksha Trading, says that retailers pay 3-8 per cent of their sales as rent. "There could be a margin loss of 0.5 - 1 per cent which is significant as this could erode margins by 10-13 per cent." He says the tax is meant to be a second tax on income and not really a service tax. "The cost would be significant — for small format retail like ours the big plus is the Rs 8 lakh exemption limit. Hopefully, a lot of our properties will be below the floor service tax limit. We hope that as lot of our rents are below Rs 8 lakh per annum we may not be hit much. But I still think this is retrograde," he adds.

A duty cut on plywood and air-conditioners would benefit the sector and will render less expensive retail fitments, but retailers may start compressing the space that would be leased or rented.

Says Mr T.S. Ashwin, Managing Director, Odyssey India Ltd, a retail chain of book and music stores across the country, "Service tax on lease and rentals will surely impact our bottomlines. We will be careful about renting/leasing out spaces in tier-I cities." In two years, Odyssey plans to have a presence in 20 cities, adding about 5-lakh sq ft at an investment of about Rs 125 crore.

Mr Ashwin foresees retailers considering the shop-in-shop concept as a more viable option in future.

Mr Kaushik Roy, CEO, GFA India, that runs the Pizza Corner and Coffee World outlets in India, says that a 12.2 per cent service tax would mean a 3.7 per cent impact on its P&L, which is `huge.'

By the end of this year he said that the chain's plan was to have 85 outlets (both brands) across the country and all GFA outlets are either rented or leased spaces. "Now we'll have to compromise either on the space taken or the location. Also, we'll have to think twice about experimenting in hot locations in cities such as Delhi and Mumbai. Shop-in-shops are a viable option, but we're yet to decide on that," he says.