GST on Rent of Residential Property

The Goods and Services Tax (GST) on rent went into force on July 18th. However, the GST will only apply in particular circumstances and not in all situations. The government recently removed the exception for renting out residential properties to businesses. In this article, we will discuss GST imposed on Rent on Residential Properties.

Quick Look

With effect from July 18, 2022, GST exemption on the service of renting a residential dwelling for use as a habitation (SAC 9972) would be limited when the receiver is not registered under GST. If the beneficiary of the service is registered for GST, the service will be subject to GST at the rate of 18%. However, the recipient must pay the tax under reverse charge. The Recipient would also be eligible to claim the ITC of the GST paid via reverse charge because rent is a business expense and is not on the list of barred ITC under section 17 (5).
But before we shall be looking at the GST on Rent of Residential Property, let us take a short brief on the practice of renting that is prevailing today.

Concept of Rent in relation to GST

Under the GST scheme, rent is considered a taxable provision of service. In some instances, both renting the property by the landlord and renting the property by the tenant are recognized as an extension of service under the tax system. As a result, under the Central Goods and Services Tax Act, 2017 which went into effect in July 2017, GST is levied on both rental revenue (paid by the landlord) and rent paid (to be paid by the tenant).

It should be noted that the application of GST on rent arises depending on the final use of the property rather than the kind of property. Even though the property is residential, GST on rent and GST on rental income will apply as long as it is used for commercial or business activities.

Rate of GST on Rent

The GST Council has removed an exemption formerly provided for the rental of residential units under the GST regime, which would increase the cost of supplying business guest homes or staff housing by GST-registered enterprises.

GST-registered renters would be required to pay GST at 18%, regardless of whether the landlord is GST-registered or not, following the modification, which was announced during the 42nd meeting of the GST Council on July 13, 2022, and went into effect on July 18, 2022. On August 12, 2022, the Press Information Bureau (PIB) provided a full explanation of the matter.

“Rental of a residential unit is taxed only when rented to a commercial entity.” There is no GST when it is rented to a private individual for personal use. “No GST, even if proprietor or partner of business leases dwelling for personal use,” the PIB tweeted on the implementation of GST on rent on July 18, 2022.

This implies that GST-registered owners or partners in GST-registered enterprises would not have to pay GST on rental housing if they use it for personal purposes.

Application of GST to Rental Income

Rent is included in the definition of “outward supply” as stated under Section 2(83) of the CGST Act. Furthermore, rental income is included in the “scope of supply” as defined by section 7 of the CGST Act.

Additionally, the CGST Act’s Schedule II, which lists the acts or transactions that should be considered to represent the provision of goods or services, expressly mentions the following rent types:

• Any type of lease, license, easement, or another form of land occupancy.
• Any lease or letting out of the building for business or commerce, including one at an industrial, commercial, or residential complex.

Claiming Input Tax Credit for paying rent under the GST

A GST-registered renter will now be required to pay GST on rent through the reverse change method and then claim Input Tax Credit (ITC) on the amount actually paid. However, be aware that the Central Goods and Services Tax Act’s Section 17(5) (g) prohibits the use of the GST paid for any services for “personal consumption” as an input tax credit. It only applies to purchases made for “business reasons.”

Input tax credit on GST paid on advance leasing payments is now possible thanks to a recent decision by the Tamil Nadu Authority for Advance Ruling (AAR). Based on the reasoning that upfront payments made for repair or improvement of premises are similar to real estate transactions and since there is no ITC available on such transactions, no such relief should be extended in such cases, tax authorities have thus far refused to allow tax credit on GST paid on upfront lease premiums.

For long-term leases of 30 years or more of industrial plots or plots for the development of infrastructure for the financial industry, upfront premiums, also known as premiums, salami, costs, prices, development charges, etc., are due. This non-refundable sum is comparable to the down payment a homeowner makes at the time of home purchase for a renter.

ITC is applicable for upfront lease charges utilized for building property classified as “plant and machinery,” according to the Tamil Nadu AAR judgment.

Impact of the renter’s GST Tax on housing

According to the experts, the decision may limit the growth of rental real estate in India by increasing the tax burden on companies who lease out residential buildings to be used as guest homes and housing for their staff.
For example, if a tenant pays a monthly rent of Rs. 1 lakh, the value of the property would be between Rs. 5 crore and Rs. 6 crores. The GST, which would cost about Rs 18,000, may eventually drain the renter’s bank account as well as that of the property owner since the tenant might try to lower the rent. As a result, fewer people would volunteer their homes for rent because their ability to make a profit from rentals may be negatively harmed. Investors may decide not to invest, which might have an influence on demand for projects including luxury property.

According to experts, the action will have a significant negative impact on the government’s declared policy of promoting rental housing in India. On the one hand, it will make companies pay more and comply with regulations. On the other hand, it can also cause the government to lose money. As a result of which, Companies would rather rent the property in the names of their workers, who would not be GST-registered than have their names on the rental contract in order to avoid paying the GST.
Further, the country’s co-living sector would suffer as a result of the decision to introduce an 18% GST. The majority of co-living businesses rent out resident houses to students from private proprietors. Since they often have GST registrations, the introduction of an 18% GST will reduce their already meager profit margins.
Be aware that those who earn a salary neither need to register for the GST nor pay the 18% tax on the rent they pay to landlords.

GST on rental income vs. GST on rent

Be aware that the GST on rent and the GST on rental income are two separate taxes. When a landlord gets an annual rent of Rs. 20 lakh, GST on rental income is applicable, and the landlord is essentially required to pay GST on rental revenue.

Contrarily, GST on rent is the tax that the renter is responsible for paying if they are a GST-registered firm and are utilizing a residential property for commercial purposes. Simply put, the tenant pays the GST on rent while the landlord is responsible for paying the GST on rental revenue.

The tenant and landlord would both be responsible for paying 18% GST, bringing their combined GST obligation to 36% in the event that a residential property is rented out for business purposes to a GST-registered individual who earns an annual rental fee of Rs 20 lakh.

GST Exemptions for Rent

In the following circumstances, GST on Rent is exempt:

• If the immovable property is a home used for living,
• During the financial year, the landlord’s total value of services rendered and commodities supplied was less than Rs. 20 lakhs, and he is not registered for GST;
• A registered charity trust or a religious trust that owns and operates a house of worship open to the public is receiving rent, and:
• It costs Rs. 1,000 or less each day to rent a room.
• Shops and other commercial locations require a monthly rent of at least Rs. 10,000.
• Rent for community halls or open spaces is charged at a daily rate of Rs. 10,000 or less.

Important Points for Consideration

Following are the points for consideration for a taxpayer to be kept in mind:

• The GST that the renter is paying to the landlord may be eligible for an Input Tax Credit.
• Based on the GST Return filing schedule, the landlord would be obliged to submit GST Returns and pay the GST collected with the government.
• GST and TDS are not the same. In such circumstances, the renter would also need to deduct TDS from the rent. 

Takeaway

The exemption provided by Notification No. 12/2017-CT (Rate) dated 28.06.2017 must continue if the residential property is given to an unregistered person for use as a dwelling solely. The exemption provided by Notification No. 12/2017-CT (Rate) dated 28.06.2017 shall not be allowed if the residential property is supplied to an unregistered person for use as a business purpose. Instead, the supplier must charge GST on a forward charge basis.

Additionally, pursuant to Notification No. 05/2022-CT (Rate) issued July 13, 2022, GST shall be due on an RCM basis whenever the residential property is conveyed to a registered person for any purpose, whether residential or commercial.
By following a few simple procedures, Legal Window can assist you with submitting GST Returns for any type of provider or company while offering the greatest support, on-time delivery, and ensuring the highest level of client satisfaction. Contact our staff at 072407-51000 or by email at admin@legalwindow.in.