In a significant move to prevent revenue leakage and enhance compliance within the Goods and Services Tax (GST) framework, the Central Board of Indirect Taxes and Customs (CBIC) issued Notification No. 09/2024 – Central Tax (Rate) on October 8, 2024. This notification brings under the Reverse Charge Mechanism (RCM) the renting of commercial property when an unregistered person provides the service to a registered person, effective from October 10, 2024.
This change follows the recommendations made by the GST Council during its 54th meeting held on September 9, 2024, which aimed to tighten compliance and curb revenue leakage in transactions between registered and unregistered entities. While the 18% GST on rental income has been in effect for commercial properties, the latest amendment expands the scope of RCM for certain scenarios.
Key Changes Introduced by Notification No. 09/2024
In exercise of the powers conferred by Section 9(3) of the Central Goods and Services Tax Act, 2017, the Central Government, on the recommendations of the GST Council, amended the existing rules outlined in Notification No. 13/2017 – Central Tax (Rate). A key addition is the inclusion of Serial No. 5AB in the table of services under RCM.
New Entry Under Serial No. 5AB:
The exact entry is as follows:
| Serial No. | Category of Supply of Services | Supplier of Service | Recipient of Service |
|---|---|---|---|
| 5AB | Service by way of renting of any property other than residential dwelling. | Any unregistered person | Any registered person |
This amendment shifts the responsibility of paying GST (18%) from the unregistered landlord to the registered tenant under RCM. The registered recipient (tenant) is required to calculate, pay GST, and may claim Input Tax Credit (ITC), provided the rented property is used for taxable activities.
Other Scenarios for GST on Rental Income (Existing Provisions)
In addition to the new RCM rule, the existing provisions on GST applicability on commercial rental income remain unchanged in other cases. Below are the scenarios as per the existing law:
1. Tenant and Landlord are Both Unregistered
If neither the tenant nor the landlord has obtained a GST registration, the liability to pay GST at 18% is not applicable.
2. Tenant is Unregistered, Landlord is Registered
In this scenario, the landlord (being registered under GST) will charge 18% GST on the rent in the invoice and remit the GST. The tenant, being unregistered, will not be able to claim ITC.
3. Both Tenant and Landlord are Registered
When both the landlord and the tenant are registered under GST, the landlord will collect 18% GST from the tenant. The tenant can claim ITC for the GST paid, provided the property is used for taxable business purposes.
4. Tenant is a Composition Dealer, Landlord is Registered
If the tenant is a composition dealer under GST and the landlord is registered, the landlord charges 18% GST on the rent. However, the composition dealer tenant cannot claim ITC on the GST paid.
5. Tenant is a Composition Dealer, Landlord is Unregistered
As per Notification No. 09/2024, effective from October 10, 2024, if the tenant is a composition dealer and the landlord is unregistered, the tenant must pay 18% GST under RCM. The tenant, being a composition dealer, cannot claim ITC on this payment.
6. Tenant is Registered, Landlord is Unregistered
Starting from October 10, 2024, if the tenant is registered under GST and the landlord is unregistered, the tenant is required to pay 18% GST under RCM. The tenant can claim ITC for the amount paid under RCM.
Summary Chart of GST Applicability
| Scenario | Tenant’s GST Status | Landlord’s GST Status | GST Applicability | Who Pays GST? | ITC Eligibility for Tenant |
|---|---|---|---|---|---|
| 1. Both Unregistered | Not Registered | Not Registered | No GST | N/A | N/A |
| 2. Tenant Unregistered | Not Registered | Registered | 18% FCM | Landlord | No |
| 3. Both Registered | Registered | Registered | 18% FCM | Landlord | Yes |
| 4. Tenant Composition Dealer | Composition Dealer | Registered | 18% FCM | Landlord | No |
| 5. Tenant Composition Dealer | Composition Dealer | Not Registered | 18% RCM | Tenant | No |
| 6. Tenant Registered | Registered | Not Registered | 18% RCM | Tenant | Yes |
Impact and Conclusion
The key change brought by Notification No. 09/2024 is the introduction of RCM for scenarios where an unregistered landlord rents out commercial property to a registered tenant. Effective from October 10, 2024, this change ensures compliance and tax collection in cases where the service provider (landlord) is unregistered, shifting the tax burden to the recipient (tenant).
Registered tenants need to account for the 18% GST under RCM, and they can claim ITC where applicable. For businesses renting commercial properties from unregistered landlords, it is crucial to adapt to these new responsibilities.
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