The GST treatment of renting of residential properties has been a recurring area of dispute since the inception of GST, while the exemption for “renting of residential dwelling for use as residence” appears straightforward on paper, its practical application has led to significant litigation—particularly in cases where residential premises are leased to companies, institutions, or operators, who in turn provide accommodation to individuals.
A major area of confusion arose where residential properties were leased to companies for use as hostels or paying guest (PG) accommodations which was a common phenomenon in education dominated cities, especially for students and working professionals. Tax authorities often took the view that once a residential property is leased to a commercial entity, or used as a hostel, the exemption ceases to apply, treating such arrangements as commercial or lodging services taxable under GST.
This conflict between form (lessee being a company) and substance (actual usage of premises being residential) has now conclusively been addressed by the Supreme Court in State of Karnataka v. Taghar Vasudeva Ambrish.
Legal Framework – What the GST Law Provides
1. Charging Provision
Under Section 7 of the CGST Act, 2017, renting of immovable property constitutes a supply of service and such supply is taxable unless specifically exempted.
2. Exemption Notification
Entry 13 of Notification No. 9/2017-IGST (Rate) dated 28.06.2017 (pari materia with Notification No. 12/2017-CT (Rate) exempts:
“Services by way of renting of residential dwelling for use as residence.”
Thus, three essential conditions emerge:
1. There must be renting of immovable property;
2. The property must qualify as a residential dwelling; and
3. The dwelling must be used as a residence.
3. Absence of Statutory Definitions further complicates things
Notably:
- The term “residential dwelling” is not defined under the CGST Act or Rules.
- The law does not expressly state that the lessee must himself reside in the property.
This legislative silence has led to conflicting interpretations by Advance Ruling Authorities across States, many of which denied exemption where:
- The lessee was a company; or
- The property was used as a hostel / PG accommodation.
Facts of the Case:
In the present case:
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The assessee was a co-owner of a residential building and the property was leased to a company, which further sub-let individual rooms as hostel accommodation to students and working professionals. The duration of the stay ranged from 3 months to 12 months, indicating long-term occupation and the municipal records classified the property as residential.
The GST Department sought to deny exemption on the ground that:
- The property was leased to a commercial entity, and
- It was being used as a hostel, which according to the Department amounted to commercial use.
Findings and Ruling of the Hon’ble Supreme Court
The Hon’ble Supreme Court dismissed the Department’s appeals and upheld the exemption, laying down several important principles.
1. Residential Character Depends on Nature and Use, Not the Lessee
The Court held that the character of the property as a residential dwelling does not change merely because:
- It is leased to a company, or
- The property is sub-let to multiple occupants.
Municipal classification and structural design as a residential building were held to be relevant indicators.
2. Long-Term Stay Qualifies as “Use as Residence”
The Court emphasized that:
- Accommodation for 3 to 12 months constitutes residential use.
- Students and working professionals were residing in the premises, not using it as temporary lodging like hotels or guest houses.
Thus, the condition of “use as residence” was clearly satisfied.
3. Exemption is Activity-Specific and Not Person-Specific
A crucial ratio laid down by the Apex Court was that:
The exemption under Entry 13 is activity-specific, i.e., linked to how the property is used, and not person-specific, i.e., who the immediate lessee is.
The Court rejected the Department’s argument that exemption requires the lessee himself to reside in the property. It was sufficient that the ultimate occupants used the premises as a residence.
4. Hostel Use Does Not Automatically Mean Commercial Use
The Hon’ble Supreme Court clarified that:
- A “hostel” per se does not lose its residential character when:
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- Occupation is long-term,
- The purpose is residence, and
- There is no hotel-like transient accommodation.
Practical application and points to watch out for:
While the judgment is clearly favourable, taxpayers and advisors should remain cautious on the following aspects:
√ Nature of Stay
- Ensure that the accommodation is long-term in nature.
- Short-term or transient stays akin to hotels may still attract GST.
√ Documentary Evidence
- Maintain:
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- Lease agreements specifying residential use,
- Sub-lease / occupancy agreements showing minimum stay periods,
- Municipal records classifying the property as residential.
√ Use in Practice
- Actual use must align with residential purpose.
- Facilities or services resembling hotel operations (daily housekeeping, room service, short stays) could weaken the exemption claim.
√ Post-2022 Amendments
- This judgment relates to the law prior to amendments restricting exemption where property is rented to registered persons.
- Transactions after the amendment must be examined separately.
To conclude, the Hon’ble Supreme Court’s ruling in State of Karnataka v. Taghar Vasudeva Ambrish brings much-needed clarity to the GST exemption on renting of residential dwellings. By affirming that the exemption is use-based rather than lessee-based, the Court has aligned GST interpretation with commercial realities of modern urban living, where residential accommodation is often organised through institutional operators.
The judgment not only settles a contentious issue but also reinforces the principle that substance must prevail over form in tax interpretation. For property owners leasing residential premises for long-term accommodation, this decision provides strong judicial backing—subject, of course, to careful structuring and compliance.
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