Goods and Services Tax (“GST”) is a destination-based indirect tax levied on the final consumers of goods and services. The GST regime was introduced in India in 2017, replacing the erstwhile indirect tax regime of Excise Duty, Service Tax and Value Added Tax and consolidating all such taxes into GST.
The taxable event under the Central Goods and Services Tax Act, 2017 (“CGST Act”) for the levy of GST is the supply. Thus, the liability to pay GST arises at the time of supply of goods or services. The term ‘supply’ has been defined to include ‘all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business’ under Section 7(1)(a) of the CGST Act.
As per aforementioned inclusions, any supply of goods or services in the form of rental or lease made for consideration in the course of furtherance of business, is a taxable supply under the CGST Act. Previously, supply of the service of residential property on rent or lease was entirely exempted from the levy of GST under the CGST Act.
In the 47th Meeting of GST Council held on 28.06.2022 and 29.06.2022 conducted at Chandigarh, it was decided to provide for levy of GST on rental or lease of residential property made to a registered person under the CGST Act.
This Blog shall elaborate upon the implications of GST on rental or lease, taking into account the recent Notification of the Central Board of Indirect Taxes and Customs (“CBIC”) withdrawing the previous exemption granted on rental or lease of residential property.
POSITION PRIOR TO THE GST REGIME
Before the introduction of the GST regime in India, Chapter V of the Finance Act, 1994 provided for the imposition of Service Tax on taxable services, which included the service of renting of immovable property for use in the course of, or in the furtherance of business or commerce.
However, the ‘services by way of renting of residential dwelling for use as residence’ was included in the Negative List of services under Section 66D(m) of the Finance Act, 1994. Thus, the service of providing a residential dwelling for residential purpose through rent or lease was a non-taxable service under the Finance Act, 1994 and did not attract the levy of any Service Tax on the amount of rent or lease paid.
POSITION UNDER THE GST REGIME
Prior to the 47th Meeting of GST Council
Up to 17.07.2022, GST was not applicable on the service of providing residential property to any person on rent or lease. The CBIC vide Notification No. 12/2017 – Central Tax (Rate) dated 28.06.2017 had exempted the ‘services by way of residential dwelling for use as residence’ under Entry No. 12. The said Notification exempted the provision of rental/lease service of residential dwelling to any registered person, with the supplier of such service being any person.
After the 47th Meeting of GST Council
With effect from 18.07.2022, GST is made applicable on the service of renting or leasing of residential property to a registered person under the CGST Act. The registered person is required to discharge the GST applicable on Reverse Charge basis.
The exemption granted prior to 18.07.2022 through the Notification No. 12/2017 – Central Tax (Rate) dated 28.06.2017 has been amended by CBIC vide Notification No. 04/2022 – Central Tax (Rate) dated 13.07.2022, amending Entry No. 12 of Notification No. 12/2017 to exempt ‘services by way of renting of residential dwelling for use as residence except where the residential dwelling is rented to a registered person’.
Further, the ‘service by way of renting of residential dwelling to a registered person’ has been inserted into Notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017 as Entry No. 5AA vide Notification No. 05/2022 – Central Tax (Rate) dated 13.07.2022, thereby making the service of providing residential property to a registered person on rent or lease a taxable supply under the CGST Act and subject to GST on Reverse Charge basis.
Thus, when a residential dwelling is provided on rent or lease by any person to a registered person, such supply shall attract GST at the rate of 18%. The liability to discharge the GST lies on the recipient of the service, i.e., the tenant who shall discharge the GST on the amount of rent/lease paid on Reverse Charge basis.
GST IMPLICATIONS ON RENT OR LEASE OF RESIDENTIAL PROPERTY
In light of the aforementioned Notifications and withdrawal of exemption on the service by way of rental or lease of residential property, the following scenarios emerge with regards to the applicability of GST on rent/lease of residential property:
1. Service of providing Residential Dwelling to GST Registered Person on Rent/Lease
a) Rented for Residential Use
The exemption previously granted under Notification No. 12/2017 – Central Tax (Rate) dated 28.06.2017 for the rent/lease of residential property for residential use to registered person has been withdrawn pursuant to Notification No. 04/2022 – Central Tax (Rate) dated 13.07.2022.
Thus, GST shall be applicable on such service on Reverse Charge basis pursuant to Entry No. 5AA inserted in Notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017 vide Notification No. 05/2022 – Central Tax (Rate) dated 13.07.2022.
With effect from 18.07.2022, the recipient of such service being the registered person is required to discharge GST at the rate of 18% on Reverse Charge basis, irrespective of the supplier being a registered or unregistered person, and is entitled to claim the GST paid as Input Tax Credit (“ITC”).
b) Rented for Commercial Use
As the Entry No. 5AA inserted in Notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017 vide Notification No. 05/2022 – Central Tax (Rate) dated 13.07.2022 does not mention the words ‘residential use’ or ‘commercial use’ in the description of supply, it can be inferred that applicability of GST on such situations only depends upon the nature of property, i.e., residential property and not on its intended manner of usage. Thus, GST in such situations would be extended to both residential and commercial usage.
As a result, with effect from 18.07.2022, the recipient of the service of renting/leasing residential property for commercial use, being a registered person, is also required to discharge GST at the rate of 18% on Reverse Charge basis and may claim ITC on the same.
2. Service of providing Residential Dwelling to Unregistered Person on Rent/Lease
a) Rented for Residential Use
The amended Entry No. 12 of Notification No. 12/2017 only excludes the renting of residential dwelling to a registered person from the exemption granted to renting of residential property. Thus, the service of providing residential property on rent/lease to any unregistered person shall remain exempted from the levy of GST pursuant to Entry No. 12 of Notification No. 12/2017.
b) Rented for Commercial Use
The service of providing a residential dwelling on rent/lease for commercial purposes by an unregistered person to another unregistered person is not a taxable supply and would not attract GST. However, if the supplier makes supplies of more than Rs. 20 Lakh, the supplier would be required to obtain GST registration and such services would be subject to the applicable rate of GST.
If a residential dwelling is provided on rent/lease to an unregistered person by a registered person for commercial purpose, GST at the rate of 18% shall be applicable on Forward Charge basis payable by the supplier.
IMPACT ON RENTAL MARKET
Although the aforesaid Notifications have been introduced to ensure that the Revenue receives the payment of adequate taxes on supplies which are taxable in nature, the withdrawal of exemption from GST on rent/lease of residential property is likely to have an adverse impact on the rental housing market.
Multiple companies obtain housing facilities for their employees by taking on rent houses in the name of the company. With the withdrawal of the exemption, such companies may completely discontinue the provision of such housing facilities to its employees due to the enhanced burden of tax.
At the same time, the value of the rental market may drop significantly as tenants who are registered persons would seek to recover the amount of GST from the rental value. This would lead to increased amount of rent being inclusive of the GST amount, resulting in fewer registered persons opting to take residential properties on rent. Alternatively, if the amount of rent is not increased, the landlord would receive a reduced amount of rent from the tenant after deduction of the GST amount.
Thus, in both the scenarios, the tenant or the landlord would be at a disadvantage either due to enhanced rental amounts payable by the tenant or due to reduced rental earnings made by the landlord. In such a situation, the rental market is likely to drop significantly as it may see fewer registered persons opting to rent residential property, or the landlords of residential property refusing to rent the same to registered persons.
The service of providing residential property on rent or lease had remained exempted from the levy of any form of indirect tax, be it Service Tax or GST, since the inception of Service Tax law in India. The Finance Act, 1994 had categorically excluded the service of rental of residential property from the levy of Service Tax, by including it in the Negative List as a non-taxable supply.
With the onset of GST in India, the intention of the legislature remained in consonance with the pre-GST position, i.e., to exempt the levy of GST on the service of providing residential property on rent or lease. However, after the 47th GST Council Meeting, the Central Government through the CBIC decided to extend the applicability of GST on rent/lease of residential property, when the tenant is a registered person under GST.
The expansion of applicability of GST on rent/lease of residential property shall have a two-fold impact, with the Revenue receiving additional taxes from registered persons, while the tenant, who is registered under the CGST Act, incurring enhanced tax burden arising on the rent or lease of residential property.
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