Mounting tax burden

The recent stay order on the service tax on commercial rentals by Delhi and Andhra Pradesh Government has pronounced the solidarity of retail fraternity. Retailers are up in arms to combat the finance ministry’s decision. The big players in retail like Shoppers Stop, More, Croma, Home Solutions and Trent, and also the multiplex operators like PVR and Inox are vociferously protesting the decision and are chalking out the future plan to defy the tax levied on.

In the 2010-2011 union budget finance ministry announced that rental income from immovable property will be under the purview of 10.3 per cent service tax. Considering the thin profit margin of 1-2 per cent made by the retailers, such move by the Government will haul the retailers in a depressive state. As Mr Vinay Nadkarni, CEO of Globus explains, “Service tax at 10.3 per cent on rentals results in 1 per cent to 1.5 per cent of the retail sales, which is a significant amount when we know that most of the retailers operate on a wafer thin margin. Since retailers do not charge service charge, there is no set off available, as a result this tax is going out of retailers’ pockets and hence its impact is very harsh.”   

Ideally rentals should be 3-4 per cent of the total revenue, but in India, retailers on average pay up to 10-12 per cent of their revenue for rentals.  Adding to this woe is the service tax.  The solution doesn’t lie in passing this burden to the consumers who are already the victim of VAT and no organised retailer will stand for this policy to scare way the customers in a situation when modern retail is still biting dust with its minimal share against the huge number of traditional retailers.

The impact of GST

Though the Government considers renting out a taxable activity, Delhi High Court ruled out that service tax can be levied on those services that make value addition. If there’s no value addition, there’s no service. In this present situation the only solution available is to defer service tax till Goods and Service Tax (GST) is introduced so this tax is set off against the other payables.

 Ms Saloni Roy, Tax Partner, Ernst & Young, explains, “With the introduction of GST, it is expected that the distortions in the current tax regime would be removed.  Since the GST would be a comprehensive tax on supply of all goods and services with input tax credits allowed at all levels, the GST levied on renting of property (assuming that GST is applicable on renting of property) would be allowed as credit against the GST on sale of products by the retailers.  This, in turn, should reduce the blockage of the taxes and corresponding costs of retailers.  However, the quantum of reduction in costs would depend upon various factors such as the GST rates, tax liability and allowance of credits.”

But the impact of GST won’t be not that great as Mr Nadkarni opines, “For an apparel retailer who gets goods manufactured by job workers, the GST will make an addition to the tax burden because there is no sales tax on fabric purchase these days, and the job working charges also do not attract any sales tax, whereas in case of the final output, we will end up paying at a higher rate than today’s LST of 4 to 6 per cent. What GST we have paid on the expenses will be available for set off , but that does not amount to of much significance.” Time is now for the Government to ponder how to facilitate retail development instead of putting blockage on the growth path.