Four retailers will be approaching various High Courts across the country to seek a stay order on service tax on commercial rentals

Four retailers will be approaching various High Courts across the country to seek a stay order on the service tax on commercial rentals that was imposed in this year’s Budget by finance minister Pranab Mukherjee. According to industry sources, the four retailers are Shopper’s Stop, Lifestyle, More and Reliance Retail Ltd.

The Delhi High Court had granted a stay in April 2010 in favour of Home Solutions Retail India Ltd on recovery of service tax under the newly amended Section 65 (105) (zzzz) under “Renting of Immovable Property Service”, of which the amendment was made retrospective with effect from 1 June 2006 by the Finance Act, 2010.

This ruling has encouraged other retailers also to follow the same procedure to relax the service tax on commercial rentals.

The “activity of renting itself is a taxable service,” Mr Mukherjee had said while announcing the 10% tax, the second attempt to impose the levy. It had first been introduced by then finance minister P Chidambaram in his 2007-08 budget proposal when he imposed a 12% service tax on commercial rentals.

“We haven’t approach a High Court as yet but we are contemplating it. In the next few weeks we will be approaching a High Court where our operations are impacted the most,” said Thomas Varghese, chief executive officer, Aditya Birla Retail Ltd.
 
While granting a stay on service tax for Home Solutions Retail India, the Delhi HC said that service tax is a tax on value addition provided by a service provider. If there is no value addition, there is no service. Renting of immovable property, by itself, does not entail any value addition and therefore cannot be regarded as a service. If there is some other service provided along with renting of immovable property, then any such other service would be covered under Section 65 (105) (zzzz).

The Retailers Association of India (RAI) will help these retailers to file the litigation. “RAI is helping its members to take the cases to court. The service tax impacts retail more than anyone else. Currently retailers pay 10%-12% of the turnover as rentals and the service tax is affecting them by 10.2%. On total turnover, the retailers might pay 1%-1.2% as service tax. Most retailers make a profit between 2%-4%. The government will take away half of the profit,” said Kumar Rajagopalan, chief executive officer, RAI.

He further added, “It was fine if goods and services tax (GST) was implemented in the country—then the service tax can be set off against sales tax. Retailers are already paying value-added tax (VAT). Most retail outlets are on leased spaces, they have to pay service tax. It is difficult for retailers to survive. Retailers are affected by VAT and service tax because the government is still not able to implement GST and retailers are landing in trouble.”

Reliance Retail declined to comment on any such development while Shopper’s Stop is planning to move court. “All the retailers are planning a similar action,” said Govind Shrikhande, president and CEO, Shopper’s Stop.