Commercial Renting Under Reverse Charge Mechanism (RCM): Do the suppliers need to take GST registration?
Summary: The article examines GST registration implications for suppliers of commercial renting services after Notification No. 09/2024-Central Tax (Rate) dated 08.10.2024 brought renting of immovable property, other than residential dwelling, supplied by an unregistered person to a registered person under the reverse charge mechanism with effect from 10 October 2024. It discusses Notification No. 5/2017-Central Tax dated 19.06.2017 issued under Section 23(2), which exempts persons making only taxable supplies on which tax is payable by the recipient under reverse charge from registration, and highlights a possible interpretational issue where commercial landlords crossing the Rs. 20 lakh threshold under Section 22 could seek to remain unregistered. The article contrasts this with the amendment made through Notification No. 24/2024-Central Tax dated 09.10.2024 for specified metal scrap covered by Notification No. 06/2024-Central Tax (Rate), notes the absence of a corresponding amendment for commercial renting services, and suggests that a similar clarification may remove ambiguity. It also advises suppliers whose aggregate turnover exceeds Rs. 20 lakh to obtain GST registration, discharge tax under the forward charge mechanism, and notes that registered suppliers may claim eligible input tax credit subject to Section 17(5) of the CGST Act, 2017.
1. The Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017 issued under Section 9(3) of the CGST Act,2017 was amended through Notification No. 09/2024-Central Tax (Rate) dated 08.10.2024 to bring commercial renting services under the reverse charge mechanism (RCM) for payment of GST with effect from 10 October 2024. The renting of immovable property, other than residential dwelling, supplied by an unregistered person to a registered person was brought under the reverse charge mechanism. Under this mechanism, the registered tenant becomes liable to discharge GST instead of the landlord who is unregistered due to the aggregate turnover being below the threshold prescribed for registration which is Rs 20 lakhs for services.
2. While the shift of tax liability under reverse charge is unambiguous, an important issue has arisen regarding the GST registration of landlords supplying commercial renting services. Notification No. 5/2017-Central Tax dated 19.06.2017, issued under Section 23(2) of the CGST Act, 2017, exempts those persons making only taxable supplies on which tax is payable by the recipient under reverse charge from taking GST registration. This notification continues to be in force even after commercial renting services were brought under reverse charge. The GST laws of various States/UTs do have similar provisions.
3. The issue may be appreciated through an illustration. Assume that a commercial building owner leases it out say with effect from 1 January 2025, well after Notification No. 09/2024-Central Tax (Rate) came into force on 10.10.2024. The commercial space is let out to say nine GST-registered business entities at a total monthly rent of ₹9 lakh as an unregistered person, resulting in an annual rental income of ₹1.08 crores. Since the tenants are registered, GST on the rent is payable by the tenants under reverse charge in terms of Notification No. 09/2024-Central Tax (Rate) dated 08.10.2024. Further, Notification 7/2025-CTR dt 16.1.2025 amended Notification 13/2017-CTR to state that the tenants opting to pay tax under composition scheme ,though registered under GST are not liable to pay tax on RCM basis.
4. During January 2025 and February 2025, the commercial building owner may continue without GST registration because his aggregate turnover from taxable services has not yet crossed the threshold of ₹20 lakh prescribed under Section 22 of the CGST Act, 2017. However, on receipt of the rent for March 2025, his aggregate turnover reaches ₹27 lakh and exceeds the prescribed threshold. From that stage onwards, the building owner cannot legitimately remain outside the GST registration framework merely because GST on the rental income was discharged by the tenants under reverse charge during the initial two months.
5. Nevertheless, a literal reading of Notification No. 5/2017-Central Tax may result in an argument that the building owner continues to make only such taxable supplies on which tax is payable by the recipient under reverse charge and, therefore, he need not obtain GST registration at all. If such an interpretation is accepted, then it would enable even landlords earning commercial rental income in crores of rupees, to remain outside the supplier-side GST compliance mechanism.
6. The reason for such an interpretation can be examined, and the answer lies in the expression “unregistered person” as a supplier of commercial renting service mentioned in the Notification No. 09/2024-Central Tax (Rate). In the context of the CGST Act, 2017 and the Notifications issued thereunder, an “unregistered person” means a person whose aggregate turnover from taxable supplies, including commercial renting services, does not exceed the threshold of Rs 20 lakhs prescribed under Section 22 of the CGST Act, 2017. Thus, the notification appears to refer only to those persons who are lawfully outside the registration net.
7. The statutory position also becomes clear on a combined reading of the provisions of the CGST Act, 2017. Section 22 is the substantive provision creating the liability for registration. Once the aggregate turnover exceeds the prescribed threshold, registration becomes mandatory unless specifically exempted under the Act itself. Notification No. 5/2017-Central Tax, being delegated legislation issued under Section 23(2), cannot override or dilute the statutory mandate contained in Section 22 of the CGST Act, 2017.
8. The Government itself appears to have recognised a similar issue while introducing reverse charge on specified metal scrap falling under Chapters 72, 73, 74, 75, 76, 79, 80 and 81 of the First Schedule to the Customs Tariff Act, 1975 through Notification No. 6/2024-Central Tax (Rate) dated 08.10.2024, amending Notification No. 4/2017-Central Tax (Rate). Simultaneously, Notification No. 5/2017-Central Tax, was also amended through Notification No. 24/2024-Central Tax dated 9.10.2024 by inserting a proviso clarifying that suppliers of specified metal scrap falling under chapters 72 to 81 covered in Notification 6/2024-CTR, could not claim exemption from GST registration and would be required to obtain registration on crossing the prescribed threshold. The proviso was thus brought in harmony with Section 22 of the CGST Act, 2017.
9. However, no corresponding amendment appears to have been made to Notification No. 5/2017-Central Tax when commercial renting services were brought under reverse charge through Notification No. 09/2024-Central Tax (Rate). As a result, the notification continues in its original form, giving rise to an avoidable interpretational issue notwithstanding the clear statutory mandate contained in Section 22 of the CGST Act, 2017 on taking registration.
10. The absence of a corresponding amendment also creates an anomalous and discriminatory situation. Landlords providing commercial renting services who had obtained GST registration prior to the coming into force of Notification No. 09/2024-Central Tax (Rate) continue to discharge GST under the forward charge mechanism even when their tenants are registered under GST law because the reverse charge notification applies only where the supplier is an unregistered person. If, however, persons commencing commercial renting services say on or after 1 January 2025 are permitted to remain unregistered even after crossing the threshold prescribed under Section 22 by relying upon Notification No. 5/2017-Central Tax, they would continue to have the benefit of reverse charge with the tenants paying GST. This would result in two classes of commercial landlords carrying on the same business and earning similar rental income being subjected to different GST compliance obligations merely because one obtained registration before the notification 9/2024-CTR coming into force while the other continued to remain unregistered thereafter because of the contents of Notification No.5/2017-CT . Such differential treatment among persons belonging to the same class of service providers would be arbitrary and unsustainable.
11. Viewed in this background, the illustration of the building owner receiving total monthly rent of ₹9 lakh demonstrates the legal position. While he may lawfully remain unregistered during the initial period before crossing the threshold, he cannot continue to remain outside the GST registration framework after his aggregate turnover exceeds ₹20 lakh. The reverse charge mechanism merely shifts the liability to pay tax from the supplier to the recipient; it does not dispense with the statutory obligation to obtain registration once the threshold prescribed under Section 22 of the CGST Act, 2017, is crossed.
12. A suitable amendment to Notification No. 5/2017-Central Tax, on the lines adopted while introducing reverse charge on specified metal scrap through Notification No. 06/2024-Central Tax (Rate), may remove the present ambiguity and bring complete harmony between the notification and the statutory provisions governing registration under the CGST Act, 2017. Such a clarification would minimise avoidable disputes, ensure uniform treatment of all commercial landlords, and promote greater certainty in tax administration.
13. Meanwhile, the taxpayers supplying commercial renting services would be well advised to adopt a cautious approach. Persons whose aggregate turnover from commercial renting services exceeds the threshold of ₹20 lakh prescribed under Section 22 of the CGST Act, 2017 need to obtain GST registration and thereafter discharge GST under the forward charge mechanism by collecting tax from their GST registered tenants. Once the supplier becomes a registered person, Notification No. 09/2024-Central Tax (Rate) ceases to apply because the reverse charge mechanism is confined to supplies made by an unregistered person only. Further, taking GST registration is advantageous to the commercial renting services suppliers, because they can take input tax credit on tax paid on services used by them like house keeping and cleaning services, electrical, plumbing, lift maintenance and similar other services and various professional services subject, of course to input tax credit (ITC) eligibility under Section 17(5) of the CGST Act,2017.
14. This approach would safeguard taxpayers against proceedings for non-registration and consequential demands of tax, interest and penalty while ensuring compliance with the statutory provisions of the CGST Act, 2017.
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Author: By K. Raji Reddy, IRS, Assistant Commissioner of Customs and Central Tax, (Retired)
(Views expressed are personal views of the author.)
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