Service tax on commercial property

While a service tax on commercialproperty seeks to introduce greatertransparency in the transactions involved, the immediate downside is also quiteapparent, says Sanjay Dutt

Budget 2010 intends to bring alllease agreements pertaining to commercial property, including offices,business centers, shop and malls ,cold storage facilities and warehouses as well as all other premises used forbusiness purposes under the purview of service tax. The benefits of the staythat the Delhi High Court had placed on service tax collections with regards tothe renting out of commercial premises herewith stands revoked. While this iscertainly a step towards introducing greater transparency into the transactionsinvolved, the immediate downside is also quite apparent. Tenants calculateeffective rent per month per square foot on carpet area.

Landlords calculate their net earnings after paying all taxes and otherpayables. Any additional layer of cost, such as service tax, will have an impact. In abuyer's market, landlords will end up taking the hit -in a seller's market, itis the tenant who is impacted. The commercial realestate market is definitely a buyer's market.Either way, it becomes one of the items of negotiation of rent. In short, thisis definitely going to increase cost for owners as well as tenants.

Secondly, it is in overall terms not good for the industry as there are already very unpredictable items of cost such property tax, which continues to increase, and any increase of cost will affect owners' net earnings. Investors will now be more careful of investing in commercialassets , especially income generating assets,since purchasing such properties on a fixed return basis will now yield significantly lower returns. Where an agreement already exists between tenant sand landlord and no provision are made for such tax-related escalations, itwill lead to increased litigation and need for arbitration.

With the immediate impact ontenants, landlords and investors beyond dispute, there will be no serious long termrepercussions. Tenants have, by now, factored in the service tax componentsinto their expected capital outlay.

With the business climate once again turning positive, they will tend to lookbeyond this additional expense and towards the benefits of doing business fromsuitable located and enabled office premises.
We are once again witnessing as teady increase in demand for quality office spaces by financial institution sand even IT/ITES. The short-term discomfort brought about by the more broad-based enforcement of service tax will be offset by the strong growthfundamentals in Indian commercialreal estate sector , which will soon absorb thisrelatively minor setback. The author is CEO business, Jones Lang LaSalle Meghraj (JLLM)

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