Owners and landlords of commercial properties believe that the proposal will add to their cost and will lead to inflationary pressure. Thus, the raise in rentals will be the most obvious step for them to take.

Finance minister Pranab Mukherjee had announced in the Union budget that all commercial agreements or contracts between a lessor and lessee for rent and lease would come under the service tax net with retrospective effect from June 2007. The move to recover service tax with retrospective effect means revoking the benefits of the stay that Delhi high court has placed on service tax collections with regard to renting of commercial premises.

Sanjay Dutt, chief executive officer (business), Jones Lan LaSalle Meghraj, said the move is certainly a step towards introducing greater transparency into the transactions involved in renting commercial properties. He added that the immediate downside is quite evident.

"Tenants calculate effective rent per month per square feet 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," Dutt said. "In a buyer's market, which the commercial real estate is, landlords will end up taking the hit - in a seller's market, it is the tenant who is impacted. 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."

According to realty experts, the government's decision is not good for the industry as very unpredictable items of cost such as property tax continue to rise, and any increase of further cost will affect owners' net earnings.