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Cess on rental to hit retailers' profit
March, 03rd 2007

Retail chains are ruing the levy of 12.36 % service tax-cum-education cess on rentals for retail space and warehousing as it is expected to put marginal pressure on their profit earnings. Quick back-of-the-envelope calculations indicate retailers profitability may take a knock of less than 1%.

While profit margins of large-format stores and stores operating out of malls will dip by 0.75 %, that of medium-sized ones like the neighbourhood grocery chains will be down by 0.25 %. Elaborating, Landmark chief operating officer Himanshu Chakrawarti said: These calculations of a drop in profit holds true only if all outlets and warehouses are on lease. In most cases, retailers opt for a mix of leased and owned properties for its outlets.

Therefore, the impact will vary from one player to another and will depend on the ratio of leased-owned properties. While the grocery outlets and neighbourhood chains claim rent accounts for about 2-3% of total sales, it hovers around 6-8% for large format stores. Hence, large format stores as well as mall outlets will be worst hit. The market is so price-sensitive that we will have to absorb this additional burden, R Subramanian, managing director, Subhiksha, said.

While the impact of the new service tax on value retailing (hypermarket) properties will be Rs 6-7 per square feet a month, it will Rs 9-10 per sq ft a month on lifestyle retailing. Therefore, for a chain operating with 10 lakh sq ft of leased properties, the impact will be Rs 12 crore a year. Retail business being competitive as it is, recovery of this is going to be very difficult, said Sumantra Banerjee, president & chief executive, RPG Retail.

ET spoke to a cross-section of retailers who claimed that they will not be able to pass on the increased overhead costs to consumers primarily because of the competitive market scenario. In an MRP-based regime, there is practically no scope to pass on this additional burden to consumers. However, retailers dealing with a large bouquet of private labels have the flexibility to marginally increase their product price, Mr Chakrawarti added.

Industry circles suggest warehouse rentals typically account for some 15% of the retailers occupancy costs. Since these warehouses are located in suburban areas, the rentals are low. Stores with warehouses adjacent to outlets in high-street locations and malls will feel the pinch more because of high rental rates, said Gibson Vedamani, CEO, Retailers Association of India.

Incidentally, rentals for retail space have shot up significantly in the last couple of months. Rental costs in metros have increased by 30-35% on an average and by about 50-55% in high-street locations like Mumbais Linking Road and Kolkatas Camac Street. Tier II cities too have seen rental costs escalating by 20-25% over the last couple of months, Mr Vedamani said.

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