Bangalore: Imposition of service tax on renting of immovable property for use in commerce or business as announced in the Union Budget 2007-08 by the finance minister P Chidambaram, is not likely to impact the offtake of commercial real estate or office space in the country.

However, the inclusion of units of the Software Technology Parks of India (STPI) under the minimum alternative tax (MAT) framework is likely to have some effect on the expansion of IT and ITES sectors and the movement of such units from tier-I to tier-II cities in the country.

According to source in the realty sector, demand for commercial office space is driven mainly by the service industry which can hope to set off this service tax burden against service tax credit they received from rendering their services.

"In a good market where there is a healthy mix of supply and demand, the landlord passes the buck on to the tenant. If the market is bad and demand for space is low, then there is no other option for the landlord than to negotiate the price keeping the tax component in mind," said Manisha Grover, head strategic consulting at Jones Lang Lasalle India.

Ankur Srivastava, managing director, DTZ India, differs.

"Service tax on renting of immovable property is to have a major impact on the retail shops and related real estate segment as realty costs are as high as 30 per cent of their total cost," he warns.

"Service tax can result in increase in property cost as the end-user demand remains strong in the country," says Sanjay Verma, executive managing director, South Asia, Cushman & Wakefield India.

In the country, across seven cities, about 55 million square feet got absorbed in 2006.

Bangalore topped the chart in 2006 with the highest absorption of space, at 10,00,000 square feet, as against 700,000 sq.ft. in 2005.

According to Srivastava, the IT/ITES sector currently accounts for 60-70 per cent of Grade A commercial space absorption in India. At present, the units located under the STPI scheme enjoy various tax holidays under section 10A of the Income-Tax Act.

However, these provisions are set to end in March 2009.

Industry players expected this date to be extended.

Instead of extending this deadline, the budget has levied MAT at 10 per cent plus surcharge on such units.

"The cost of doing business for companies currently located in STPIs may go up and may compel them to look at alternatives like relocating to special economic zones (SEZ) to cut costs or curtailing expansion plans in India, thus constricting the demand for commercial space", said Srivastave.

"While this would impact most Indian IT/ITES companies, captive units of overseas companies operate on a transfer pricing model and can now pay taxes in India and seek a credit against it at the parent entity level (in their home country)," he added.

Source: Business Standard