GST on reimbursement of municipal property tax by lessee / occupier

In re Kolay Properties Ltd (GST AAR West Bengal)

Authority for Advance Rulings (AAR), West Bengal, examined the applicability of GST on the reimbursement of municipal property tax by a lessee in the case of Kolay Properties Ltd. The applicant had entered into a lease agreement with Andhra Bank (later merged into Union Bank of India) for premises in Kolkata. Under the lease, the bank was obligated to reimburse 50% of the municipal property tax paid by the lessor. The applicant sought clarity on whether GST should be applied to this reimbursement.

The applicant argued that property tax is a statutory levy under the Kolkata Municipal Corporation Act, 1980, and falls within the ambit of Section 15(2)(a) of the CGST Act, 2017. This section states that any taxes, duties, cesses, or fees imposed under a law other than the GST Act and charged separately by the supplier should be included in the value of taxable supply. The applicant contended that lease rent alone should be considered the transaction value, and municipal tax reimbursement should not be subjected to GST.

The Revenue, however, argued that since property tax reimbursement is not covered under Schedule III of the GST Act (which lists non-taxable supplies), it should be included in the value of supply under Section 15. The officer also highlighted that property tax itself is not a supply of goods or services under GST, but if it is charged separately by the lessor to the lessee, it becomes part of the taxable value.

The AAR ruled in favor of the Revenue’s interpretation, stating that property tax reimbursement by the lessee forms part of the value of taxable supply. Citing Section 9(1) of the GST Act, which mandates tax on the value determined under Section 15, the authority held that municipal property tax, when reimbursed, is included in the taxable value of supply. Consequently, GST is applicable on such reimbursements.

This ruling aligns with previous decisions on similar issues, reinforcing the principle that any charges levied under laws other than the GST Act, when passed on to the recipient, should be included in the taxable value of supply. The decision underscores the importance of careful structuring of lease agreements to avoid unintended GST liabilities.

FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING WEST BENGAL

1.1 At the outset, we would like to make it clear that the provisions of the Central Goods and Services Tax Act, 2017 (the CGST Act, for short) and the West Bengal Goods and Services Tax Act, 2017 (the WBGST Act, for short) have the same provisions in like matter except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean reference to the corresponding similar provisions in the WBGST Act. Further to the earlier, henceforth for the purposes of these proceedings, the expression “GST Act” would mean the CGST Act and the WBGST Act both.

1.2 The applicant has entered into a lease agreement with Andhra Bank, Munshi bazar Branch, Kolkata (hereinafter referred to as the ^„Lessee’, ^„Occupier’) to let out an area on the first floor of Premises No. 10/2, Beliaghata Road, Kolkata-700015 (hereinafter referred to as the ^„leased premises’) to use the said leased premises for locating the Bank’s Munshi Bazar Branch for carrying out banking business only.

1.3 The applicant states that effective from 1st April, 2020, Andhra Bank and Corporation Bank were amalgamated into Union Bank of India in pursuance of an amalgamation scheme notified by the Central Government vide gazette notification dated 4th March, 2020.

1.4 The applicant has made this application under sub section (1) of section 97 of the GST Act and the rules made there under seeking an advance ruling in respect of following questions:

Whether GST is applicable on reimbursement of municipal property tax by the lessee/occupier?

1.5 The aforesaid questions on which the advance ruling is sought for are found to be covered under clause (e) of sub-section (2) of section 97 of the GST Act.

1.6 The applicant states that the question raised in the application has neither been decided by nor are pending before any authority under any provision of the GST Act.

1.7 The officer concerned from the Revenue has raised no objection to the admission of the application.

1.8 The application is, therefore, admitted.

2. Submission of the Applicant

2.1. The applicant has drawn attention to the following features of the lease deed:

• The duration of the said lease is for a period of 15 (fifteen) years out of which 5 (five) years will be certain and 10 (ten) years (5 years+5 years), will be with option for renewal with 20% increase of the then existing rent for every 5 (five) years on the terms and conditions detailed in the agreement.
• The Lessee will pay rent at a fixed rate per square foot and within the time period to the Lessor as specified in the agreement.
• The above referred rate is exclusive of the occupier’s share of Property Tax, Commercial Surcharge and Service Tax. The Lessee shall reimburse to the Lessor along with payment of monthly lease rent as referred above the occupier’s share of property Tax, Commercial Surcharge and Service Tax in the manner as detailed in the agreement. The Lessee shall also be liable to bear any increase and/or fresh imposition of municipal taxes, Goods and Service Tax, other taxes, surcharges, cesses, levies etc. imposed by Municipal and/or any Government authorities for purpose of occupation of the premises.
• The Lessor will pay all the taxes, surcharges and demands to the Municipal Local Authorities or Governments on the due dates. The Bank shall bear 50% of the Property Tax being Occupier share of same, the Commercial Surcharge and Service Tax/Goods and Service tax.
• The Bank will however currently pay the occupier share of property tax and the commercial surcharge on the basis of the existing Annual Valuation as evident from the IB1 records of the Kolkata Municipal Corporation and shall be liable to reimburse to the Lessor/Landlord the enhanced amount of occupier’s share of Property Tax and Commercial Surcharge as and when the enhanced lease rent becomes recorded in the records of the Kolkata Municipal Corporation. The Bank however shall pay the Service Tax @ 15% of the enhanced lease rent for the period from October 2016 to June 2017 and thereafter GST @ 18% of the lease rent effective from July 2017 till any changes in the GST rates are made.

2.2 The applicant states that lessee had paid towards 50% of occupier’s share of property tax spanning period from July ^„17 to March’ 20. The process of calculation of property tax in KMC has been changed from previous Annual Rateable Value (ARV) to Unit Assessment System (UAA) and based on this method applicant has raised invoice vide no GST/A/0761/22-23 dated 02.03.2023 which is inclusive of GST @ 18% of receivable amount from lessee, for period April 2020 to March 2023.

2.3 The applicant further argues as follows:

^{I. ”}Transaction value’ is the lease rent which is the price actually paid or payable by the lessee/occupier to the applicant for the supply of lease services; that the applicant and the lessee/occupier are not related and price i.e. lease rent is the sole consideration for the supply. Hence, the value of supply of such lease service is the lease rent.

II. Section 15(2) provides for certain inclusions in the value of supply. Clause (a) thereof as stated above provides that the value of supply shall include the amount of tax which is charged by the supplier separately which is levied under any law for the time being in force other than the GST law.

III. The property tax charged by KMC is a tax levied under ^„The Kolkata Municipal Corporation Act, 1980‟ which is a law other than the CGST Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act and hence falls within the ambit of section 15(2)(a) of the CGST Act.

3. Submission of the Revenue

3.1 The revenue officer from Chowringhree Division, CGST&CX has submitted the reply as enumerated below:

i. Schedule III under section 7(2) of the GST Act governs the non taxable supplies. The consideration received by the taxpayer is not against supplies covered under the schedule III. Hence, the consideration received is against a taxable supply.

ii. The value of supply will be determined in terms of section 15 of the GST Act. Section 15(2) clearly mentions that the value of supply shall include any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this act. Hence the component of municipal taxes will be part of the taxable value.

iii. Property tax is considered as a statutory levy imposed by local authorities and is not classified as a supply of goods or services or both under GST.

iv. However, if a property owner receives services related to property management or maintenance this service may be subject to GST.

4. Observations & Findings of the Authority

4.1 We have gone through the records of the issue as well as submissions made by the authorized representative of the applicant during personal hearing.

4.2 The only issue pertinent to this case is whether GST is applicable on reimbursement of municipal property tax by the lessee/occupier. In other words, whether the value of supply as determined by the applicant will include the amount paid by him on account of municipal property tax.

4.3 In terms of sub-section (1) of section 9 of the GST Act, tax in levied inter alia on the value determined under section 15 of the said Act. It has already been submitted by the applicant himself that section 15 of the GST Act deals with value of taxable supply. The provision of sub­section (2) of the said section, being relevant in this case, is represented as follows:

(2) The value of supply shall include:

(a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier.

4.4 In this case, the municipal property tax levied under the Kolkata Municipal Corporation Act, 1980, being a tax other than the CGST Act/ WBGST Act/ UTGST Act/ GST (Compensation to States) Act shall therefore form a part of the value of supply on which GST will be levied.

In view of the foregoing, we rule as under:

RULING

In the instant case, value of supply would be inclusive of municipal property tax and tax under the GST Act is payable on such value.