Reverse Charge on Commercial Property Rent from Unregistered Persons

Introduction: A Silent Shift in GST Compliance

In October 2024, the GST Council introduced a seemingly simple amendment with Notification No. 09/2024 – Central Tax (Rate). But beneath the surface, this change fundamentally disrupted tax planning strategies involving commercial property rentals.

Effective October 10, 2024, GST became payable under Reverse Charge Mechanism (RCM) when a registered person rents a commercial property from an unregistered person. What was once a widely exploited loophole quietly closed, forcing businesses to recalibrate their leasing structures and GST compliance processes.

The Legal Backbone: Key Provisions and Notifications

In exercise of the powers conferred by Section 9(3) of the Central Goods and Services Tax Act, 2017, the Central Government, on the recommendation of the GST Council, issued Notification No. 09/2024 – Central Tax (Rate), amending Notification No. 13/2017 – Central Tax (Rate) by inserting Serial No. 5AB. This new entry brings within the ambit of reverse charge mechanism (RCM) the service of renting of any property other than a residential dwelling, when provided by an unregistered person to a registered person. As per this amendment, the liability to pay GST at 18% shifts from the unregistered landlord to the registered tenant, who must self-invoice, discharge the tax liability under RCM, and may claim Input Tax Credit (ITC) subject to eligibility. The legal backing for this change is rooted in Section 9(3) of the CGST Act, 2017, Section 5(3) of the IGST Act, 2017 for inter-state supplies, and Section 12(3) of the IGST Act, 2017, which specifies that the place of supply for services related to immovable property is the location of the property itself.

Why This Change? The Policy Logic

The amendment is not just a revenue measure; it is a structural correction aimed at:

• Closing a GST Loophole: Businesses were deliberately choosing unregistered landlords to avoid tax.
• Bringing Parity: Residential properties rented for business purposes were already under RCM from July 18, 2022. This amendment extends a similar treatment to commercial properties.
• Aligning With Global Practices: Countries like Singapore and Australia implemented reverse charge on property rentals early to block similar revenue leakages.

Pre-Amendment Practical Scenarios: How the Loophole Was Exploited

Deliberate Structuring to Avoid GST

• Many companies intentionally leased commercial properties from unregistered landlords to sidestep GST liability. This allowed them to reduce operational costs by avoiding the 18% GST applicable under normal circumstances.

Family Ownership Models

• Businesses often structured property ownership within families, registering commercial properties under the names of non-GST registered family members. This tactic kept rental income outside the GST net, even though the property was used for taxable business activities.
• Example: A company leased office space from the director’s spouse, who was not registered under GST. Since the landlord was unregistered, no GST was charged, and the company avoided reverse charge liability under the old regime.

Disputes Over Legacy Agreements

Tenants argued that pre-GST rental agreements or contracts signed before the introduction of reverse charge provisions exempted them from GST obligations. This led to legal ambiguities and disputes over tax applicability.

Non-Uniform Tax Treatment

The GST liability on rent varied depending on the registration status of the landlord, creating inconsistency and confusion. Identical rental transactions were taxed differently solely based on whether the landlord was registered under GST.

Transitional Scenarios: Critical GST Triggers

Practical Twist: Although Section 13(3)(a) of the CGST Act says the time of supply under RCM is the earlier of payment or 60 days from invoice, the service itself wasn’t taxable before October 10. This creates a legal grey zone where advance payments made before the notification date for post-notification rental periods could attract conflicting interpretations.

Current industry practice is conservative: Pay GST under RCM for the rent applicable to the post-notification period, even if advance payment was made.

The Place of Supply Puzzle: Cross-State Complexities

Under Section 12(3) of the IGST Act, 2017, the place of supply for services related to immovable property—such as renting commercial premises—is always the location of the property, regardless of where the recipient (tenant) is registered. This means that even if the tenant operates from another state, IGST is not applicable. Instead, the tenant must discharge GST as CGST + SGST of the property’s state under the reverse charge mechanism (RCM). This provision ensures that tax revenue accrues to the state where the property is situated, maintaining consistency with the destination-based taxation principle.

GST Applicability on Commercial Rent:-

• Under the GST framework, the applicability of tax on commercial rent depends on the registration status of both the tenant and the landlord. If both tenant and landlord are unregistered, no GST is applicable as neither party falls within the taxable net under Section 22 of the CGST Act, 2017.
• When the landlord is registeredand the tenant is unregistered, GST is payable under the Forward Charge Mechanism (FCM) at 18%, and the landlord is responsible for collecting and remitting the tax under Section 9(1) of the CGST Act
• If both parties are registered, GST continues to apply under FCM, and the tenant is eligible to claim Input Tax Credit (ITC)under Section 16, provided the property is used for business purposes.
• In cases where the tenant is a composition dealer, ITC is blocked under Section 10 and Section 17(5), even if the landlord is registered and GST is paid under FCM

However, when the landlord is unregistered and the tenant is registered or a composition dealer, GST liability shifts to the tenant under the Reverse Charge Mechanism (RCM), as per Notification No. 09/2024 – Central Tax (Rate), which inserted Entry 5AB into Notification No. 13/2017 – CTR, effective October 10, 2024

In such cases, the tenant must self-invoice and pay GST directly to the government, and ITC is available only if the tenant is a regular taxpayer and the property is used for taxable outward supplies.

GST Applicability on Commercial Rent – Summary Table

Compliance Checkpoints: What Tenants Must Do

• Self-Invoice: Issue as per Rule 46 of CGST Rules.
• Payment Voucher: Required under Rule 52 for RCM transactions.
• GST Return Reporting: Report in GSTR-3B (Table 3.1(d)). No reporting required in GSTR-1.
• Correct Tax Heads: Always use CGST + SGST of the property’s state. Do not pay IGST.
• Contract Review: Renegotiate old agreements to include GST clauses if not present.
• ERP Configuration: Ensure systems can handle RCM entries where the tax state differs from the tenant’s registration state.
• Team Training: Accounting and tax teams must be trained on RCM self-invoicing and correct place of supply logic.

The Hidden Risks: Common Mistakes and Audit Triggers

• IGST Payment Error: Many tenants may wrongly pay IGST instead of CGST + SGST. This is a common future audit point.
• ERP Mismatches: Cross-state RCM without state registration may not align with system validations.
• Fixed Establishment Confusion: Unclear treatment of properties that are semi-manned or regularly accessed.
• Advance Payment Grey Zones: Potential litigation on whether advance rent paid before the notification date is taxable for post-October 10 rental periods.

Strategic Action Plan for Businesses

• Lease Reviews: Check all current agreements with unregistered landlords.
• Ledger Segmentation: Maintain separate accounting codes for cross-state RCM rentals.
• ERP Adjustments: Ensure your system allows CGST + SGST payments in other states without raising errors.
• Training: Educate procurement, accounting, and tax teams on the new compliance flow.
• Advance Rulings: Consider applying for rulings where fixed establishment status is unclear.

Conclusion: A Minor Notification with Major Consequences

What may appear to be a routine reverse charge insertion is actually a compliance disruptor that:

• Forces businesses to abandon GST avoidance rental structures.
• Creates new challenges in tax classification, especially in cross-state transactions.
• Demands close attention to ERP configurations and lease documentation.
• Introduces new risks in advance payments, place of supply logic, and fixed establishmentinterpretations.

Key Technical FAQs

Q1: Is there any threshold limit for RCM applicability on commercial rent?

No. RCM on commercial rent applies irrespective of the transaction value. Even if the rent amount is below the GST registration threshold (₹20 lakhs or ₹10 lakhs in special category states), RCM is applicable if the landlord is unregistered and the tenant is registered.

Q2: Does RCM apply if the landlord is exempt from GST due to low turnover?

Yes. The status of the supplier (landlord)—whether exempt or below threshold—is irrelevant. If the landlord is unregistered, and the tenant is registered, RCM applies under Entry 5AB.

Q3: Can the tenant opt to pay IGST instead of CGST + SGST for convenience?

No. As per Section 12(3) of the IGST Act, the place of supply is the location of the property, making it an intra-state supply. Hence, CGST + SGST must be paid, and IGST is not permitted, even for cross-state transactions.

Q4: What happens if the tenant fails to discharge GST under RCM?

Failure to pay GST under RCM can lead to interest, penalties, and denial of ITC. The tenant is treated as the deemed supplier for tax purposes and is fully liable for compliance.

Q5: Is RCM applicable on security deposits or refundable advances?

No. Security deposits that are refundable and not adjusted against rent are not considered consideration for supply and hence not liable to GST. However, if adjusted against rent, GST under RCM applies.

Q6: Can RCM apply to shared office spaces or co-working arrangements?

Yes, if the arrangement involves renting of immovable property from an unregistered person to a registered business, RCM applies. The nature of the space (shared or exclusive) does not exempt it from GST liability.

Q7: Is RCM applicable if the tenant is a government department?

RCM applies only if the government department is registered under GST and uses the property for business or taxable activities. If not registered or used for sovereign functions, RCM may not apply.

Q8: Can the tenant claim ITC if the rented property is used for mixed purposes?

ITC can be claimed proportionately if the property is used for both taxable and exempt supplies. However, if used for personal or non-business purposes, ITC is blocked under Section 17(5)