The Supreme Court’s ruling in Taghar Vasudeva Ambrish has conclusively settled the GST treatment of renting residential dwellings used as hostels and PG accommodations for the period prior to 18 July 2022. Interpreting Entry 13 of Notification No. 9/2017-IGST purposively, the Court held that long-term hostels and PGs qualify as “residential dwellings,” and that the decisive test for exemption is the use of the property as a residence, not the identity or commercial nature of the lessee. Accordingly, leasing residential premises to hostel or PG operators remained exempt until the 2022 amendment, which cannot operate retrospectively. Taxes collected earlier were held to be without authority of law, opening the door for refunds under Section 54 of the CGST Act. However, the post-18 July 2022 regime—imposing GST under reverse charge while keeping outward accommodation exempt—creates tax cascading and policy inconsistencies, underscoring the need for legislative realignment.
1. Background
Entry 13 of Notification No. 9/2017-IGST (Rate), as originally notified, exempted:
“Services by way of renting of residential dwelling for use as residence.”
The exemption was unconditional and did not prescribe any requirement that the lessee must personally occupy the premises. Despite this, divergent Advance Rulings and departmental interpretations treated leasing of residential buildings to hostels, PG operators, and aggregators as taxable, on the premise that the lessee was a commercial entity and not the ultimate user.
This interpretational conflict culminated in litigation, culminating in the Supreme Court’s judgment in Taghar Vasudeva Ambrish.
2. Supreme Court’s Ruling: Core Legal Findings
The Supreme Court affirmed the Karnataka High Court’s decision and held:
1. Meaning of “Residential Dwelling”
Hostels and PG accommodations used for long-term stay constitute “residential dwellings”. Temporary lodging facilities such as hotels or guest houses stand on a different footing.
2. Use as Residence – Determinative Test
The decisive factor is the use of the premises, not the identity of the lessee. Sub-leasing to students or working professionals does not alter the residential character.
3. Exemption is Activity-Specific
Entry 13 grants an exemption based on the nature of the service, not on whether the recipient is an individual or a corporate entity.
4. No Retrospective Application of 2022 Amendment
The amendment effective from 18 July 2022, withdrawing exemption where the residential dwelling is rented to a registered person, cannot be applied retrospectively.
Accordingly, GST levied or paid on such transactions prior to 18 July 2022 was held to be without authority of law.
3. Refund Consequences: Tax Paid Without Authority of Law
The judgment has significant refund implications:
- GST paid on renting of residential dwellings up to 17 July 2022 qualifies as tax wrongly paid.
- Refund claims are maintainable under Section 54 of the CGST Act, read with Article 265 of the Constitution.
- The limitation period, in cases arising from judicial pronouncements, is generally reckoned from the date of the Supreme Court judgment, when the right to refund crystallises.
- The doctrine of unjust enrichment applies, except in cases of reverse charge, where the tax is not collected from any other person.
Thus, the ruling restores constitutional discipline by reaffirming that the State cannot retain taxes not sanctioned by law.
4. Post-18 July 2022 Regime: An Anomaly
With effect from 18 July 2022, Entry 13 was amended to exclude exemption where residential dwellings are rented to registered persons. Such transactions were simultaneously brought under the reverse charge mechanism (RCM).
Thus, practical implication is that:
- Registered hostel and PG operators are required to pay GST under RCM on residential rent.
- Their onward supply of accommodation to students or working professionals continues to be exempt.
- Input tax credit of RCM GST is blocked, resulting in tax cascading.
This creates a structural inconsistency within the GST framework, where inputs are taxed but outputs remain exempt.
5. Unresolved Issues and Sectoral Impact
Despite judicial clarity for the pre-2022 period, several concerns remain:
- Taxation of Social Infrastructure
Student housing and workforce accommodation are essential social infrastructure, yet are taxed indirectly through RCM.
- Mismatch Between Input and Output Taxability
The GST design principle of credit neutrality is compromised.
- Inflationary Effect
The RCM burden ultimately increases the cost of education-linked accommodation.
- Absence of Targeted Policy Recognition
Unlike educational services, residential facilities supporting education lack explicit statutory protection.
6. Suggestions to Government
In light of the Supreme Court ruling and post-amendment distortions, the following measures merit consideration:
1. Re-align Exemption with Use of Property
Restore exemption based on residential use, irrespective of the recipient’s registration status.
2. Introduce a Specific Exemption for Student and Workforce Housing
Recognise hostels and long-term PG accommodations as a distinct category of residential services.
3. Rationalise Reverse Charge Mechanism
Exclude residential renting used for exempt residential accommodation from RCM.
4. Facilitate Refunds for Legacy Periods
Issue CBIC guidelines for uniform and simplified refund processing in light of the Supreme Court judgment.
5. Policy Alignment with Constitutional and Social Objectives
Ensure GST policy does not inadvertently tax essential housing linked to education and employment.
7. Conclusion
The Supreme Court’s decision in Taghar Vasudeva Ambrish marks a decisive reaffirmation of purposive interpretation and constitutional limits on taxation under GST. While it resolves legacy disputes and enables refunds for the pre-18 July 2022 period, it also exposes policy incongruities introduced thereafter.
A forward-looking response from the legislature and tax administration is essential to ensure that GST remains a tax on consumption and not a tax on necessity. The judgment provides the legal foundation; coherent policy action must now complete the reform.
Author Bio
