In Re E-Square Leisure Pvt. Ltd. (GST AAAR, Maharashtra)

Levy of GST on Interest Free Security Deposit and Notional Interest was put in front of AAAR, Maharashtra. The appellate authority held that the definition of consideration is inclusive and the consideration may be in cash or kind. The payment received towards Interest Free Security Deposit will not be treated as consideration, if there is no direct link between the payment and supply. From the close scrutiny of above definition it is clear that there should be a close nexus between the payment and supply and thus any payment/exchange/barter etc would be treated as consideration for supply and liable to GST. Prima facie a conclusion can be drawn without much difficulty that a deposit given in respect of the supply shall not be considered as payment made for such supply unless the supplier appropriates such deposit as consideration for the said supply.

The security deposit taken by the applicant is to secure or to act as a guarantee as per the terms of agreement against damages to the properties. Further, admittedly applicant has taken security deposit against the damages caused to the furniture, equipment’s, fittings supplied along with the premises or damage done to the properties. The undisputed fact is that the amount of deposit taken by the applicant is Rupees Fifty Seven Crore for the period of 18 years – in the subject case, the deposit received by the applicant cannot be treated as consideration for the supply made by the applicant and therefore they will not be liable to pay GST on such deposit amount received by them.

The applicant, for leasing of commercial property has, in addition to rent, also collected interest free deposit from their lessee which is returnable on the completion of the tenure of the lease. Since the entire amount is to be returned back to their lessee, such deposits cannot be considered as consideration for such supply of services as mentioned by them and hence will not be liable to tax. However, if the entire deposit or a part of it is withheld and not paid back at completion of lease tenure, as a charge against damages, etc. then at that stage such amounts not returned back will be liable to GST as per the present GST laws.  

Relevant Extract of AAAR Order

At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / MGST Act would be mentioned as being under the “GST Act”.

The present application has been filed under section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by E-SQUARE LEISURE PVT LTD., the applicant, seeking an advance ruling in respect of the following questions :

– Whether GST would be applicable on interest free security deposit and notional interest if any?

– In case GST is applicable what would be value of notional interest for levy of GST?

Facts of The Case

  • This application is being filed by E SQUARE LEISURE PRIVATE LIMITED (‘Company’/ ‘Applicant’ / We’) having its registered office at 132A, University Road, Ganeshkhind, Pune – 411 016.
  • The Company is engaged in various services including renting of immovable property to business entities for commercial purpose. The Applicant is discharging GST on the rent received from the lessees. The Applicant has also taken interest free security deposit (hereinafter to be referred as “security deposit’) from the lessees.
  • The security deposit taken from the lessees on account of security against the damages, if any, caused to the furniture, equipments, fittings supplied along with the premises or any damage done to the properties. Further, such security deposit is taken on returnable basis and shall be returned on completion of tenure of lease.

Observation

Applicant is engaged in supply of various services including renting of immovable property to business entities for commercial purpose. The Applicant is discharging liability under the provisions of GST Act on the amount rent received from the lessee. Applicant has taken security deposit from the lessee as security against damages to property such as furniture, fittings attached with the property or any damage to the property leased. The security deposit is free from any interest payable to lessee that is Interest Free Security Deposit. This interest free security deposit is the central point of this application and applicant seek clarification on the levy of GST on such deposits.

Thus, the issue for our consideration in this application is the leviability of GST on interest free deposit and notional interest ‘if any’. The taxable event in GST is supply of goods of services or both. The term ‘supply’ is inclusive in nature can be understood in terms of following parameters namely:-

1. Supply of goods or services. Supply of anything other than goods or services does not attract GST.

2. Supply should be made for a consideration.

3. Supply should be made in the course or furtherance of business.

4. Supply should be made by a taxable person.

5. Supply should be a taxable supply.

Besides above parameters, GST Laws have provided certain exceptions to the requirement of supply being made for consideration and in the course of furtherance of business.

We therefore have to find whether the security deposit taken from lessee on account of security against damages, if any, caused to the furniture, equipment’s, fittings supplied along with the premises or any damage constitute consideration is vis a vis any supply under the provisions of GST Act. Section 2(31) defines the term consideration as following:-

(31) “consideration” in relation to the supply of goods or services or both includes-

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

The definition of consideration is inclusive and the consideration may be in cash or kind. The payment received will not be treated as consideration, if there is no direct link between the payment and supply. From the close scrutiny of above definition it is clear that there should be a close nexus between the payment and supply and thus any payment/exchange/barter etc would be treated as consideration for supply and liable to GST. Prima facie a conclusion can be drawn without much difficulty that a deposit given in respect of the supply shall not be considered as payment made for such supply unless the supplier appropriates such deposit as consideration for the said supply.

In view of the above we take up the subject matter for discussion. The term deposit is not defined in the GST Act. From the perusal of Dictionary meaning deposit has several dimension that include part or full price of the purchase, sum money paid into a bank account, a sum you pay when you start a renting something etc. Thus for a payment to be considered as security deposit should have following attributes

i) For performance of an obligation.

ii) Security against return of the hired goods.

iii) Security against damage to properties rented.

iv) Must be reasonable.

Applying the above test to the facts of the case we find that, the security deposit taken by the applicant is to secure or to act as a guarantee as per the terms of agreement against damages to the properties. Further, admittedly applicant has taken security deposit against the damages caused to the furniture, equipment’s, fittings supplied along with the premises or damage done to the properties. The undisputed fact is that the amount of deposit taken by the applicant is Rupees Fifty Seven Crore for the period of 18 years. We find, as per the submissions made by the applicant and the facts of the matter as stated by them, the applicant will not apply such deposit received, as consideration for the said supply and therefore the provision to Section 2 (31) will not be applicable to this matter. Thus we find that in the subject case, the deposit received by the applicant cannot be treated as consideration for the supply made by the applicant and therefore they will not be liable to pay GST on such deposit amount received by them.

To sum up, we find that the applicant, for leasing of commercial property has, in addition to rent, also collected interest free deposit from their lessee which is returnable on the completion of the tenure of the lease. Since the entire amount is to be returned back to their lessee, such deposits cannot be considered as consideration for such supply of services as mentioned by them and hence will not be liable to tax.

However at the time of completion of the lease tenure, if the entire deposit or a part of it is withheld and not paid back, as a charge against damages, etc. then at that stage such amounts not returned back will be liable to GST as per the present GST laws.

ORDER

(Under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)

NO.GST-ARA-76/2018-19/B-172

Mumbai, dt. 29-12-2018

For reasons as discussed in the body of the order, the questions are answered thus –

Question :- Whether GST would be applicable on interest free security deposit and notional interest if any?

Answer :- In view of above discussion, GST is not applicable on interest free security deposit.

Question :- In case GST is applicable what would be value of notional interest for levy of GST?

Answer:- Not Answered in view of answer to question no. 01 above.

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