Calcutta, March 4: Real estate developers are crying foul: they have raised a clamour seeking the rollback of the service tax levy of 12.36 per cent on firms that rent out immovable property as it could knock the bottom out of their business.

The Confederation of Real Estate Developers Association of India (Credai) will meet finance minister P. Chidambaram tomorrow to press for a withdrawal of the levy.

Going by his record, Chidambaram is unlikely to oblige unless there is huge political pressure to do so. The real estate developers are unlikely to find great sympathy among politicians and, therefore, will probably not be able to mobilise a groundswell of political protest.

So, they have decided to ask the legal eagles to pore over the legislation to find a legal loophole that they could exploit to make the levy untenable. The real estate developers believe that they may have found it.

“On a preliminary basis, we have been informed by our lawyers that land tax is imposed by the state government and is a state tax. Since the commercial building stands on the land, we plan to challenge the incidence of service tax, which is a central subject, over and above the state tax. We are in the process of gathering further information,” said Raj Menda, national secretary, Credai, who was in the city for a foundation stone laying ceremony of his company RMZ Corp’s joint venture project.

Chidambaram is an astute lawyer and it remains to be seen whether the legal quibble will hold up in court, which is where the real estate developers plan to go if the finance minister turns down their demand. They will decide on their course of action after the vote on the budget.

Narayan Jain, a senior tax consultant, says the real estate developers have got it all wrong: the service tax will not be levied on lease rentals per se but on the service provided by firms that rent out immovable property. The distinction is important since the burden will have to be borne by the service provider rather than the person who pays the lease rental.

However, it is still possible that the service provider will pass on the burden to the lessee, leading to a surge in lease rentals.

“We feel that such an incidence of service tax will hamper the rate of infrastructure growth in sectors like IT and retail. Therefore, we have decided to move court after the vote (if the levy still remains),” said Menda.

Legal experts say any act can be challenged in the court of law and termed as an ultra vires transaction — Latin for beyond powers — which refers to acts of a corporation and/or its officers outside the powers and/or authority allowed by law. Menda, whose company RMZ Corp is a specialist in IT infrastructure development, has been getting frantic calls from IT clients who have taken up bulk space of 2 lakh sq ft or more. If the levy stands, they will have to pay an additional sum of Rs 60 lakh per month on the lower side.

In cities like Mumbai, in the medium term, rents could rise by anywhere between Rs 30 and Rs 40 per sq ft, say property consultants and developers.

“Our lawyers are also collating information on a similar case which involved service tax on hoardings with the issue of central tax over state tax (land tax). One of the state courts gave a ruling to the effect that a central tax could not be imposed over and above the existing land tax levied by the state on which the hoarding stands,” Menda said.

The new levy will hit the IT and entertainment sectors hardest. “It will make plug and play facilities dearer. Although it will be levied across the country, we will suffer more as the IT industry is new here and we have just started,” Bengal IT minister Debesh Das said.