The government's move to bring back service tax on lease rentals could become a bone of contention between retailers and mall developers. Though developers are liable to pay such a tax, it is most likely, barring a few cases, to land on the laps of retailers, say tax experts.

The new Budget proposal could shave off around 1.5 per cent of retailers' net profit or 10 to 15 per cent of their total sales, if the tax incidence is on them. They are, therefore, seeking its rollback.

For instance, Raheja-owned Shoppers Stop Ltd, which pays around Rs 100 crore as rent every year, would have to take a hit of Rs 30 crore for the past three years, as the tax proposal is with retrospective effect from June 1, 2007. Shoppers Stop posted losses of Rs 6.3 crore on a revenue of Rs 126 crore in 2008-09.

There is no other way left than fighting it out. We have to take it up with the ministry. We are also looking at all the ways and means to reduce its impact, such as sharing the tax with developers," says Govind Shrikhande, chief executive of Shoppers Stop.

A lot of retailers can turn sick companies if such a tax is imposed, says Kumar Rajgopalan, chief executive of the Retailers Association of India.

Many retailers are also talking about a burden-sharing mechanism with mall developers, an idea which developers are not keen on. "How can we share the taxes? We have not amortised the costs,'' said Vikas Oberoi, managing director of Oberoi Realty, which runs a mall in the Goregaon area of Mumbai.

Shrikhande of Shoppers Stop believes the issue would prevail till the Goods and Services Tax is implemented, as it will allow them to set off service tax on rentals against other items.

What has raised the heckles of retailers is the government's attempt to bring back the proposal even as the issue was being fought in the courts. Last year, the Delhi High Court ruled that renting of commercial space does not constitute a service. The central government has taken the issue to the Supreme Court.