GST on Hostel and PG Accommodation services

Summary: The GST on hostel and Paying Guest (PG) accommodation services, particularly for students and professionals, has been a subject of ongoing debate. Initially, accommodation services were exempt from GST under SAC 9963 and 9972. However, a tax was later introduced for services rendered to registered persons under reverse charge from July 18, 2022, with exemptions still available for B2C customers staying longer than three months. A key development post the 53rd GST Council meeting and Budget 2024 was the insertion of exemption entry 12AA, effective July 15, 2024, allowing exemptions for accommodation services priced below Rs. 20,000 per month per person for stays of 90 days or more. Despite clarifications, the precise application of these exemptions has sparked further discussions, particularly concerning the start date of exemptions and the implications for tax collection. Taxpayers must navigate these amendments carefully to ensure compliance and avoid potential legal challenges, particularly regarding refunds for past taxes paid or exemptions claimed under previous provisions. The government’s intention is to support students and professionals, but careful interpretation and adherence to the law are necessary.

The tax levy on hostel or Paying Guest Accommodation mostly availed by the student and professional community continues to be plagued by controversies despite of the positive clarifications issued by GST.

In order to understand the topic, let us refer to the Section 65(105) (zzzzw) of the Finance Act, 1994 (prior to 2012), defining the taxable service for services provided by hotels, inns, guest houses, etc., which generally involve stays for a shorter period as compared to a permanent or considerable period of stay, provided that the said service is providing accommodation for a continuous period of less than 3 months. The significance of duration is taken from this definition even under GST.

At the time of introduction of GST, vide Notification No.12/2017-CT (Rate), these services falling under SAC 9963 and SAC 9972 were exempted from GST. Later vide Notification No.4/2022-CT(R) dated July 13, 2022 tax was levied on accommodation services when rendered to a registered person under reverse charge w.e.f. July 18, 2022.

It is to be noted here that the GST exemption continued to be available post-July 18, 2022, when the accommodation services were provided to B2C customers, such as students or others intending to stay for a longer period exceeding 3 months. The exemption was no longer available post 18.7.2022 for hotel accommodation priced less than or up to Rs. 1000/day, which would be taxed at 12%.

Post-53rd GST Council meeting and Budget 2024, a new exemption entry 12AA has been inserted in Notification No.12/2017-CT (Rate) as under wef 15.7.2024:

• Supply of the accommodation service having a value less than or equal to Rs. 20,000 per person per month; and
• Said accommodation service was supplied for a minimum continuous period of 90 days.

Further, there was a clarificatory circular 228/22/2024-GST setting out that, as recommended by the GST Council, the GST liability on accommodation is regularized on an “as is, where is basis” for periods 1.7.2017 to 14.7.2024 where the value of accommodation is less than or equal to Rs.20,000 per person per month and such accommodation is provided for a minimum continuous period of 90 days.

There has been an amendment in exemption entry Sl. No. 12 of Notification No. 12/2017 (amended via Notification 4/2024 CT(R) dated July 12, 2024), which reads as follows:

Services by way of renting a residential dwelling for use as a residence, except where the residential dwelling is rented to a registered person.

Explanation 1. For the purpose of exemption under this entry, this entry shall cover services by way of renting a residential dwelling to a registered person where,

(i) The registered person is the proprietor of a proprietorship concern and rents the residential dwelling in his personal capacity for use as his own residence; and

(ii) Such renting is on his own account and not that of the proprietorship concern.

Explanation 2.: Nothing contained in this entry shall apply to

(a) accommodation services for students in student residences;

(b) accommodation services provided by hostels, camps, paying guest accommodations, and the like.

Until July 14, 2024, Sl. No. 12 of Notification No. 12/2017 CT(R) covered Heading 9963 as well as Heading 9972. However, with effect from July 15, 2024, the exemption entry covers only services classifiable under Heading 9972.

The services covered in headings 9963 and 9972 are set out further. The relevant explanatory notes to the Scheme of Classification of Services for the Heading 9963 “Accommodation, Food, and Beverage Services” are as follows:

• SAC 99632, Other accommodation services,” includes accommodation services for persons for a longer period of time and also includes semi-permanent residence in boarding houses and residential clubs.
• 996321 Room or unit accommodation services for students in student residences This service code includes room or unit accommodation services for students in student residences attached to schools and universities.
• SAC 996322: “Room or unit accommodation services provided by hostels, camps, paying guests, and the like” includes room or unit accommodation services provided by hostels, camps, or paying guests. This HSN/SAC includes accommodation services for workers in worker’s hostels or camps, usually on a short-term or seasonal basis.
• SAC 996329, “Other room or unit accommodation services, n.e.c.” includes room or unit accommodation services for semi-permanent residents in rooming or boarding houses and residential clubs; sleeping car services, etc.

Further, the relevant explanatory notes to the Scheme of Classification of Services for the heading “Real Estate Services” are as follows:

Group 99721: Real estate services involving owned or leased property

SAC 997211 Rental or leasing services involving own or leased residential property include rental or leasing services concerning residential properties by owners or leaseholders of houses, flats, apartment buildings, and multiple-use buildings that are primarily residential, as well as residential mobile home sites.

This SAC does not include:

Accommodation services provided by operating hotels, motels, rooming houses, school dormitories, campsites, and other lodging places are covered under heading 99631.

Based on the above explanatory notes, Heading 9963 covers room or unit accommodation services, hostels, camps, paying guests, and the like. Heading 9972 covers rental or leasing services concerning residential properties by owners or leaseholders’ houses, flats, apartment buildings, and multiple-use buildings that are primarily residential, as well as residential mobile home sites.

Impact of the above changes

• The intention of the revenue appears to be to extend exemption at SL No. 12AA to the service provider’s/hostels renting out accommodation per bed, per room, or per unit to customers such as students or professionals. subject to satisfying the monetary limit of Rs. 20,000 per month and staying 90 days or more.
• When food, internet, and other amenities are provided incidental to the room or unit accommodation, then it is a composite supply, whereby if, by adding up these facilities, the value exceeds Rs. 20,000, then exemption is not available even if the stay is for 90 days or more.
• The exemption at entry 12 would continue to be applicable to renting or leasing residential dwellings, for instance, flats or houses rented to families for a period exceeding 3 months.

As per Circular No. 228, the below observations are made:

1. Regularization “as is, where is basis” for periods 1.7.2017 to 14.7.2024 where the value of accommodation is less than or equal to Rs.20,000 per person per month and such accommodation is provided for a minimum continuous period of 90 days.

2. No refund option is indicated for the tax payers, who paid taxes in past years, in spite of being validly eligible for exemption. Since the amount paid is exempt, it takes the color of mere deposit and not tax and thereby the limitation of two years is not applicable. Hence they can make an effort to file refund claims.

3. For those, who did not pay tax in the past [prior to July 14, 2024] are given relief of exemption; similarly, those who paid taxes [borne burden] should be eligible for refunds [without time limit]. This is prone to litigation by the revenue.

Hence in sum and substance, the final position emerges as under:

• PG’s/Hostels can claim exemption at entry 12AA when they rent out accommodation to students, professionals, or others for less than or equal to Rs. 20,000 per month per person for 90 days or more.
• When the PG’s or hostels suppliers are only providing such exempted supplies, they are not required to take GST registration under Section 23(1) of the GST law.
• When not having GST registration, there would be no tax liability to pay tax under RCM on rentals paid to the landlords who rent out the building for further letting out.

However it is interesting to note that in some of the cases, a view is being taken that the exemption extended post 53^rd GST Council meeting are available only from 15^th September, 2024 only and not from 15^th July, 2024 as provided under the law as the 90 days continuous stay would be complete by 15^th September 2024 only when counted from 15^th July, 2024. This appears to be a highly caution position to be taken considering the Circular 228 clarifications. By resorting to such high moral grounds, if the tax payer collects GST for the period of 15^th July 2024 then it will violate the provisions of Sec 32 of CGST Act, 2017 which mandates that No registered person shall collect tax except in accordance with the provisions of this Act or the rules made thereunder. Such illegally collected tax need to be deposited with the revenue in terms of Sec 76 of CGST Act, 2017. Hence the tax payers should take note of these amendments in light of the above discussions in order to firm up their tax positions at their end and the intention of the revenue to extend the benefit of GST to the deserving classes of students and professionals is not put to jeopardy by taking high moral grounds.