A dispute seems to be on the cards between the real estate developers that lease out commercial property and their tenants on the issue of sharing the service tax on rental income.

Most of the realty players are unwilling to shoulder the entire burden of the 12.36 per cent service tax that the Government imposed recently on rental income from commercial property. They are in the process of working out a plan to pass on a chunk of new financial liability to the tenants.

"Eventually, the customers have to bear the burden. We are currently looking at how to deal with the existing rent contracts," said Mr Rajiv Talwar, Executive Director, DLF Ltd.

A similar view is held by Sahara Infrastructure and Housing's (SIH) Senior Advisor Mr Sunder Lal.

"The tenants will have to bear the entire burden as developers are not in a position to pay the tax themselves."

SIH is developing townships that will have commercial components such as malls and hospitals. But the tenants are unhappy with the extra liability.

"We work on very tight margins and we are not always in a position to absorb the extra financial load. We are not happy with the tax being passed on to us," said Mr Kabir Lumba, President-Buying and Merchandising, Lifestyle International Pvt Ltd.

`No escalation'

The dispute may get worse where a `no escalation' in rent clause has been signed between the parties. As for future course, the delegation of the new tax liability may be done by "jacking up" the rent, according to some realty players.

This could further stoke the prevailing high rentals, especially in top cities.

A recent study by commercial real estate services firm CB Richard Ellis on rentals, says, "Demand for office space is expected to remain strong in the short to medium term, especially in the peripheral and suburban areas of the Tier-I cities. A negative fallout of the buoyant demand and an adverse demand-supply equation, has been spiralling rental values across the micro-markets in most of the cities."

According to industry chamber FICCI, if the tax has to be paid, it should be borne by the tenant.

The chamber argues that the landlord pays income-tax of 33 per cent and local taxes of 30-35 per cent on rental income, apart from interest on borrowed capital, if any.