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Rent tax: Exemption for revenue-sharing
May, 28th 2007

Retailers, who share a portion of their earnings with landowners, may take it easy. Chances are there they will not have to absorb the new service tax on rentals of properties let out for commercial use by landowners. This means their tax burden will not rise any further.

We have received the government notification recently and have plans to approach the court. We are in discussions with various organisations like Multiplex Association of India and other real estate developers associations. All these associations will be meeting next week to take a final decision, said Gibson G Vedamani, CEO, Retailers Association of India. 

A landowner entering into a pure revenue-sharing arrangement with a retailer is set to be exempted from service tax. He will not have to pay service tax if the terms of his contract cover only revenue or profit-sharing. Tax will, however, be charged in contracts where the property is rented or leased out to the retailer, said a senior revenue department official.

Service tax is generally charged on the service provider who, in turn, passes on the burden to the service user. Here, the property owner is the service provider and the retailer is the service user. If the retailer pays a rent for using the space, such rentals will attract service tax. This will push up their rental costs.

The decision to impose a service tax on commercial rentals was announced in this years budget and will come into force from June 1. Landowners who rent, let out, lease or license immovable property for commercial use will have to pay the 12% service tax on the rentals.

It could also dent their profits which are already under pressure due to the high rentals in an overheated real estate market. So a couple of them are planning to pass on the burden to the consumer.

Tax officers will examine the terms of the contract between property owners and developers and compare it with the legal provisions, said sources. The fine print says that service tax will be charged on renting of immovable property and this includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course of furtherance of business.

According to a senior official, it is only logical to exempt a pure revenue-sharing contract without a rental component from service tax. This is because lawmakers have gone by the principle of Ejusdem Generis a Latin word of the same kind used to interpret loosely written statute. In this case, the phrase similar arrangement will cover activities like renting, leasing, letting out or licensing of immovable property.

Some tax experts, however, feel that getting a service tax exemption may not be that easy. Even in revenue-sharing arrangement the use of the property is definitely for use in the course of furtherance of business or commerce. Whether this arrangement is covered by the expression renting of immovable property as defined is arguable, said TR Rustagi, former joint secretary in the finance ministry.
 
Revenue-sharing arrangements between developers and retailers are popular in countries such as the US. McDonald, for instance, has such an arrangement in many cities in India. But the concept of a pure revenue-sharing is yet to catch up in a big way here as there are risks involved, says Lalit Kumar Jain, president, Promoters and Builders Association of Pune (PBAP).

Currently, most modern formats are leased by retailers. Several lease agreements hold a clause which states that any additional tax or levy will have to be borne by the lessee. For contracts entered in the past, service tax will be paid by the lessee.

In future contracts, the amount be included as part of the rentals, said a realty developer. Rentals are expected to touch over 15% of sales from around 7-8% in the previous years, and retailers are worried over the eroding margins. Globally, rentals constitute just 3-4% of sales for retailers, according to industry analysts.

 
 
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