The Union government has clarified on the new goods and services tax rules (GST) on rent, which came into effect from 18th July. In a tweet, press information bureau (PIB) said that “renting of residential unit taxable only when it is rented to business entity." It further clarified that “no GST when it is rented to private person for personal use; no GST even if proprietor or partner of firm rents residence for personal use."
As of 17 July 2022, GST was applicable on the rent of a commercial property but, from 18 July 2022, GST is being charged if such residence is rented or leased by a GST-registered person/entity. Accordingly, tenants now have to pay 18% GST on a reverse charge basis (RCM). However, they can claim this value as a deduction while they pay tax on sales in GST returns.
Explaining the changes to Moneylife, Chennai-based chartered accountant (CA) Sujatha V said “If any common salaried person has taken a residential house or flat on rent or lease, they do not have to pay GST. However, a GST-registered person/entity who carries out business or profession must incur 18% GST on such rent paid to the owner. They can claim the input tax credit on the GST paid towards rent or lease on residential property.”
Tax experts pointed out that there is no tax that is required to be discharged by the landlord whether the tenant is registered or not. The only change that has been brought about now is that a tenant who is GST-registered will no longer be able to claim the benefit of exemption from GST on residential dwellings. Tax will need to be discharged by such tenants under RCM.
The change is expected to impact corporate houses which have taken residential units on rent for their employees. GST will now be required to be paid by such registered taxpayers under reverse charge. Problems could arise if the tax department can dispute the eligibility of credit, treating it as being used for personal consumption. In such cases, it can negatively impact the profit of the company.
Talking on the possible impact of the changed rules, noted lawyer Divya Malcolm said “On account of tax implications under the Income Tax Act, most leave and license agreements, for many years, are executed directly in the name of the employees and not the companies. The new GST Notification may therefore not have a drastic impact. It may even lead to greater cash transactions.”
Echoing similar sentiments, Pankaj Kapoor founder and managing director , Liases Foras, a property research firm, said “The move will have negligible impact since it is a very small segment and the input tax credit (ITC) option is also available. Besides, most such transactions were taking place directly in the respective employee’s name for the past few years.”
Last month while toeing the line, the Confederation of All India Traders (CAIT) had said in a press statement, “The manner in which the finance ministers of all the states have distorted the basic nature of GST without consulting stakeholders, it is clear that the council has no interest in simplifying the tax system and enlarging the scope of the tax net in a healthy manner.” The traders’ body demanding rationalisation of GST rates on grounds that it is causing an adverse impact on trade and commerce.
Interestingly, it may be recalled that in June 2022, the authority for advance rulings (AAR), Maharashtra had ruled that rent or leave & license fees received by an owner of a residential flat, even if such flat has been let out to corporate entities for use by the latter’s employees, will be outside the ambit of GST. The case pertained to Kasturi & Sons, which had proposed to let out some of its residential flats, located in a posh south Mumbai area, to Life Insurance Corporation of India (LIC) approached the AAR. It contended that the flats that are going to be let out are residential apartments and they are going to be used for residential purposes only. Merely because these flats will be taken by LIC does not change the end usage to ‘commercial’.
The bench was composed of members Rajiv Magoo and RR Ramnani, who ruled that flats which are used for residential purposes, irrespective of whether they are let out to individuals or to commercial entities, will be covered by the exemption notification dated 28 June 2017. The exemption is available if the property being let out is a residential dwelling and is used for residential purposes. If the property is used for commercial purposes, the exemption is not available and the landlord or licensor would be required to register and pay GST at 18% if the annual rent crosses Rs20 lakh.
GST registration is needed when any person carries on business or profession and makes an annual turnover more than the threshold limit defined under the GST law.
In this case, as the nature of the end-use was residential, Kasturi & Sons would not have to pay GST on the monthly leave and license fee received by it. “The GST applicability is not decided by the nature of the property, but by the purpose for which it is used,” emphasised the AAR bench and held that the exemption notification would apply.
AAR also ruled that the jurisdictional officer defied all logic when he stated that the LIC staff to whom the flat is let out can sit late in office and work more, which again formed a basis to treat the leasing of flats as commercial in nature.
Tax experts highlighted that the ruling has rightly looked at the substance and end-use of the transaction, instead of the nature of earning or the recipient. Even if the landlord uses the flat to earn his living, so long as the flat is being used for residential purpose, rent should not be taxable.