While a service tax on commercial property seeks to introduce greater transparency in the transactions involved, the immediate downside is also quite apparent, says Sanjay Dutt

Budget 2010 intends to bring all lease agreements pertaining to commercial property, including offices, business centers, shop and malls, cold storage facilities and warehouses as well as all other premises used for business purposes under the purview of service tax. The benefits of the stay that the Delhi High Court had placed on service tax collections with regards to the renting out of commercial premises herewith stands revoked. While this is certainly a step towards introducing greater transparency into the transactions involved, the immediate downside is also quite apparent. Tenants calculate effective rent per month per square foot on carpet area.
Landlords calculate their net earnings after paying all taxes and other payables.
Any additional layer of cost, such as service tax, will have an impact. In a buyer's market, landlords will end up taking the hit -in a seller's market, it is the tenant who is impacted. The commercial real estate market is definitely a buyer's market. Either way, it becomes one of the items of negotiation of rent. In short, this is 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 commercial assets, 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 tenants and landlord and no provision are made for such tax-related escalations, it will lead to increased litigation and need for arbitration.

With the immediate impact on tenants, landlords and investors beyond dispute, there will be no serious long term repercussions. Tenants have, by now, factored in the service tax components into their expected capital outlay.
With the business climate once again turning positive, they will tend to look beyond this additional expense and towards the benefits of doing business from suitable located and enabled office premises.

We are once again witnessing a steady increase in demand for quality office spaces by financial institutions and even IT/ITES. The short-term discomfort brought about by the more broad-based enforcement of service tax will be offset by the strong growth fundamentals in Indian commercial real estate sector, which will soon absorb this relatively minor setback.
The author is CEO business, Jones Lang LaSalle Meghraj (JLLM)

Courtesy:HT Estates dt:06-March-2010

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