Booming education and professional opportunities, has given rise to a new sub-market in the realty sector, commonly known as the Paying Guest services (hereinafter for the sake of brevity referred to as “PG services”). The trend is catching up in many cities across India, especially where educational institutions/ offices are located. Earlier this service was provided primarily by individual house owners for generating an additional source of revenue but now the said services are being offered in an organised manner by various corporate entities. As this money-spinning business has garnered the interest of several property owners, we would like to share GST implications on various aspects of such business. The PG services are being generally offered in following manner
(i) Providing simpliciter accommodation service.
(ii) Providing accommodation service along with other services such as food, laundry, play zone etc.
Further PG services generally can be of following types:
(i) Providing simpliciter accommodation in a residential unit by letting out the whole or part of a residential house as PG.
(ii) Running a PG by an owner or by taking a building on lease which has been specially constructed for the purpose of providing PG services.
In order to examine applicability of GST on any activity, it is relevant to determine as to whether the activity amounts to supply of goods or services. The expression ‘supply’ has been defined in section 7 of the CGST Act. Section 7 of the CGST Act reads as under:
7. (1) For the purposes of this Act, the expression “supply” includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business; [and]
(c) the activities specified in Schedule I, made or agreed to be made without a consideration;
1Sub-clause (d) omitted retrospectively w.e.f. 1st July 2017 vide CGST (1st ) Amendment Act, 2018
2[(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.]
2Section 7 (1A) inserted vide CGST (1st) Amendment Act,2018 w.e.f. 1st February 2019
(2) Notwithstanding anything contained in sub-section (1),–
(a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council,
shall be treated neither as a supply of goods nor a supply of services.
(3) Subject to the provisions of [sub-sections (1), (1A) and (2)], the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as—
(a) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a supply of goods.
Section 7(1) in its original form had four limbs but Section 7(1)(d)has been omitted retrospectively w.e.f. 1st July, 2017 and a new sub-clause i.e. Section 7(1A) has been inserted vide Central Goods and Services Tax (1st) Amendment Act 2018, which came into force from 1st February, 2019. The impact of this amendment is that prior to the said amendment all activities mentioned in Schedule II, constituted a supply even if they did not pass the tests laid in Section 7(1)(a), (b) or (c). However, now the said schedule is relevant only for the purposes of determining that the activities mentioned under schedule II of the CGST Act shall be treated either as supply of goods or supply of services. The activities mentioned in Schedule II will have to constitute a ‘supply’ independently in accordance with provisions of sub-section 1 of Section 7.
To constitute supply under Section 7(1)(a) the following conditions must be fulfilled:
From a perusal of section 7 it can be seen that ‘lease’, ‘licence’, ‘rental’ have been specifically mentioned as forms of supply. Further in the present case undoubtedly there is a consideration which is paid by the students/ tenants to the service providers. Thus, the first 3 conditions as mentioned above stands fulfilled. The only question which remains is whether the services of ‘renting of immovable property’ can be said to be ‘in the course of or furtherance of business’.
The term business has been defined in Section 2(17) of the CGST Act and the same reads as under:
Section 2(17) “business” includes––
a. any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
b. any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
c. any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;
d. supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;
e. provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;
f. admission, for a consideration, of persons to any premises;
g. services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;
h. activities of a race club including by way of totalizator or a license to book maker or activities of a licensed book maker in such club; and
i. any activity or transaction is undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;”
It can be seen that the term business has been defined in an inclusive manner. This definition is very wide and covers almost all the transactions except transaction which are of personal nature. Primarily GST is applicable only on commercial transactions and any supplies made by a person in his personal capacity would not constitute a supply and consequently would not be chargeable to GST. It can be seen from the definition of business that the word ‘commerce’ has been specifically included. It will not be inappropriate to state that renting of immovable property is an activity covered under ‘commerce’.Thus, renting of immovable property can be said to be ‘in the course of or furtherance of business’. Once PG services qualify to be ‘supply’ as per section 7 of the CGST Act then in order to determine whether it is a supply of goods or supply of services we need to look into entries of Schedule II of the CGST Act.
It is important to note that Entry No.5 (a) of Schedule II of the CGST Act specifically refers to ‘renting of immovable property’ as supply of services. PG services are covered under renting of immovable property hence it will qualify as supply of service.
After having arrived at a conclusion that the services of ‘renting of immovable property’ is a supply of service, we need to examine as to whether the said supply is exempted supply or not?
Section 11 of the CGST Act empowers the Central Government to exempt goods or services or both from the whole or any part of the tax leviable thereon. In exercise of the powers conferred under section 11 of the CGST Act, the Government has issued Notification No.12/2017-Central Tax (Rate) dated 28th June 2017 whereby certain services have been exempted from tax. For the purpose of the present case-relevant entries that need consideration are as under:
|Sl. No.||Chapter, Section, Heading, Group or Service Code (Tariff)||Description of Services||Rate (per cent.)||Condition|
|12||Heading 9963 or Heading 9972||Services by way of renting of residential dwelling for use as residence||Nil||Nil|
|14||Heading 9963||Services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having value of supply of a unit of accommodation below one thousand rupees per day or equivalent||Nil||Nil|
It is worthwhile to note here that Entry no. 12 of Exemption Notification No.12/2017 Central Tax (Rate), dt. 28-06-2017 exempts only those services where the ‘residential dwelling’ is rented and the same is rented ‘for use as residence’. Therefore, it is imperative to understand the meaning of words ‘residential dwelling’ and ‘use as residence’. The phrase ‘residential dwelling’ have neither been defined in the said exemption notification nor in the GST Act. However, in normal trade parlance it shall include all residential accommodation other than hotel, motel, inn, guest house, camp–site, lodge, house boat, or like places which are meant for temporary stay. The general meaning of ‘Residential dwelling’ means a structure or part of a structure that is used as a home or residence by one or more persons who maintain a household, whether single-family or multifamily, or means the house in which a man lives with his family; a residence; the apartment or building occupied by a family as a place of residence.
The term ‘residence’ as defined by the Cambridge Dictionary as “the fact of living in a place”. ‘Residence’ as per Black Law’s Dictionary is Living or dwelling in a certain place permanently or for a considerable length of time. The place where a man makes his home, or where he dwells permanently or for an extended period of time.
In order to keep the services of temporary accommodation accessible to masses, entry 14 of the above exemption notification, seeks to grant exemption to services of low cost Hotel, inn, guest house, club or campsite, or any other place which offers services of residential or lodging purposes and is having value of supply of a unit of accommodation below one thousand rupees per day or equivalent. It is pertinent to note here that entry 14 is defined in an inclusive manner and any other service provided in the nature of hotel, inn, guest house, club will be included under the phrase ‘ by whatever name called’. In interpreting the phrase ‘ by whatever name called the rule of Ejusdem Generis should be applied. This rule states that where a law lists specific classes of persons or things and then refers to them in general, the general statements only apply to the same kind of persons or things specifically listed.
Now we need to apply the afore-stated test and examine whether the services of PG falls under entry 12 or entry 14 or none of the above entries of the exemption notification. Therefore, we proceed to examine each of the cases as mentioned above.
Case 1: Providing simpliciter accommodation in a residential dwelling by letting out the whole or part of a residential house as PG.
As per our understanding of the term ‘residential dwelling’ it can be said that a residential house even if used for providing PG services qualifies to be residential dwelling. In order to qualify for exemption under entry 12 of the said exemption notification it is necessary that the residential dwelling should be rented for use as residence. Generally, a student/ tenant takes a PG for 1 year or more and performs his/ her day to day operation thereby using it for residence purpose.
|As per the author view when a residential house is used for providing PG accommodation services it is covered by Entry no. 12 of Exemption Notification No.12/2017 Central Tax (Rate), dt. 28-06-2017. Thus, the service of providing simpliciter accommodation in a residential dwelling for use as residence is exempt from GST.|
Case 2: Running a PG by an owner or in a leased in a building specially constructed for the purpose of providing PG services.
Such PG services are basically provided in the nature of ‘hostel’. In this case PG services are being generally offered in following manner
Where PG provides simpliciter accommodation services
For providing PG services generally a building with multiple floors where there are 4-5 rooms on a single floor with a small kitchen and other facilities is constructed by the owner. In general practice, this is a service of providing hostel on rent to various students.
There are two school of thoughts with regard to exemption of the said services. As per one school of thought such PG services are covered by entry no. 12 of the notification no.12/2017-Central Tax (Rate) dated 28th June 2017. As discussed above such building qualifies to be a ‘residential dwelling’ and is rented to the students for ‘use as residence’.
As per other school of thought such services are covered by entry no. 14 of the exemption notification no.12/2017-Central Tax (Rate) dated 28th June 2017 Let us examine the said activity from the perspective of Entry no. 14 of Exemption Notification No.12/2017 Central Tax (Rate), dt. 28-06-2017. Here also there are two view possible.
(i) One view is that entry no.14 encompasses these itself accommodations whether stay is of temporary nature and the charges are collected on a daily basis. In light of this view ‘hostel’ would not fall under entry No.14.
(ii) The other view is that the ‘hostel’ would get covered in the expression ‘by whatsoever one called’ used in entry No.14 is the words hotel, inn, guest house, club or campsite by whatsoever name called.
Both the aforestated views are plausible interpretation of entry No.14.
Thus services by a hostel for residential or lodging purposes, having value of supply of a unit of accommodation below one thousand rupees per day or equivalent will be exempt. However, it is pertinent to refer to Circular no. 32/06/2018-GST dated 12-Feb-2018 wherein it was clarified that accommodation service in hostels including by Trusts having declared tariff below one thousand rupees per day is exempt. Relevant provisions of Circular no. 32/06/2018-GST dated 12-Feb-2018 is as under:
Circular no. 32/06/2018-GST
|1.||Is hostel accommodation provided by Trusts to students covered within the definition of Charitable Activities and thus, exempt under Sl. No. 1 of notification No. 12/2017-CT (Rate).||Hostel accommodation services do not fall within the ambit of charitable activities as defined in para 2(r) of notification No. 12/2017-CT(Rate). However, services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having declared tariff of a unit of accommodation below one thousand rupees per day or equivalent are exempt. Thus, accommodation service in hostels including by Trusts having declared tariff below one thousand rupees per day is exempt. [Sl. No. 14 of notification No. 12/2017-CT(Rate) refers]|
It may be pointed out that even if it is presumed that a PG/ hostel is covered under entry No.14 of Notification No. 12/2017-CT (Rate) to avail exemption under entry no. 14 the value of supply per unit of accommodation should be less than one thousand per day or equivalent. If a room is given on rent to two or more students, in that case, the total amount received for a room from all the students should be less than Rs. 1000/- per day. Thus it is of paramount important that the PG raises an invoice compute on per day basis.
|In the view of the author providing PG services may fall either under entry 12 or entry 14 of exemption notification no.12/2017 Central Tax (Rate), dt. 28-06-2017 and would ultimately be exempt from tax. However, where the charges per unit of accommodation exceeds Rs.1,000/- per day. Then it would become imperative to determine the exact classification of ‘PG service’. The said determination of the nature of ‘supply’ is both legal as well as factual.|
Where PG provides accommodation services with food and other ancillary services
Where accommodation services are provided along with food and other miscellaneous services another issue that needs to be answered is whether still GST would be leviable or not on a PG. The answer to this would lie in the fact that whether the supply of ‘accommodation service’ with other services of food etc. Would qualify as ‘composite supply’, ‘mixed supply’ or ‘independent supply of services’. To understand the legal position we must refer to relevant statutory provisions of the CGST Act which are as follows:
Section 2(30) of the CGST Act defines ‘composite supply’ and the same reads as under:
Section-2(30):- “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;
Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;
The term ‘principal supply’ has been defined in section 2(90) as under:
Section-2(90):- “principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary
The term ‘mixed supply’ has been defined in section 2(74) as under:
Section-2(74)- “Mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.
Illustration:- A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately;
Section-2(108):- “taxable supply” means a supply of goods or services or both which is leviable to tax under this Act;
Section-2(78):- “non-taxable supply” means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act;
Section-2(47):- “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;
The taxability of composite supply and mixed supply has been explained in section 8 of the CGST act as under:
(i) Taxability of composite supply: As per section 8 of the Act, the tax liability on a composite supply shall be determined as composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply. The GST rate on Composite Supply will be equal to the GST rate applicable to the principal supply of such goods and services, included in the composite supply.
(ii) Taxability of mixed supply: As per section 8 of the Act the tax liability on a mixed supply shall be determined as a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.
Now the other factor which needs to be looked into is a factual aspect of the transaction. The manner in which the charges are collected by PG would also be instrumental under determination the exact nature of transaction. The following kind of situation are possible:
(i) PG charges a lump sum amount say for example Rs.1500/- p.m. including accommodation, food and ancillary services.
(ii) PG charges an X amount towards accommodation services and gives option to the resident to avail food and other ancillary services and charges independently for each of the services.
Here we must refer to few advance rulings which have been issued on the subject.
First advance ruling was in the case of Sarj Educational Centre (AAR West Bengal)- 42/WBAAR/2018-19 dated 26/02/2019, where the facts were that the applicant was the owner of private boarding house and providing services of lodging and food exclusively to the students of a secondary school, run by a Charitable Society, namely Sunshine Educational Society.
In this case the applicant was providing both day boarding as well as lodging a facility and was charging a different amounts from day boarders and from those who were using lodging facility also. Besides this a separate amount was being charged from house keeping and laundary services. In this facts it was held by the Authority for Advance Ruling as under:
The Applicant is offering several individual services in two different combinations to the recipients, depending upon their need for lodging facility. None of the combinations of services being offered is a composite supply, as defined under section 2(30) of the GST Act. They are mixed supplies within the meaning of section 2(74) and taxable in accordance with section 8(b) of the GST Act. Being mixed supply, value of the entire combination of services offered is taxable at the applicable rate.
This ruling has also being confirmed by the West Bengal Appellate Authority for Advance Ruling in appeal case No.05/WBAAAR/appeal/2019 dated 29th March 2019. In another case of Ramnath Bhimsen Charitable Trust (AAR Chhattisgarh)-STC/AAR/11/2018 Dated 02/03/2019 facts were that Shree RamnathBhimsen Charitable Trust was running a girl’s hostel. The hostel was providing basic facilities which are required to stay and to study which include well-furnished residence, round the clock security, homely ambiance, nutritious food, ample parking space etc. and in consideration, the hostel was charging a nominal lump-sum fee of Rs. 6000/- per month per boarder. The girls residing in both the hostels were provided with various facilities like food supply from canteen, parking space, coaching, library, entertainment which are all taxable supplies. Apart from above, they were also provided with the provision of guest rooms for visiting parents of the occupants. All the facilities were only for the occupants of the hostels. The girls residing there were neither allowed to have food from outside nor were outsiders allowed to have food from hostel canteen. In this case it was held that:-
The activity of providing accommodation services by the applicant in their hostel for which the applicant is collecting an amount below the threshold limit of Rs. 1000/- per day and no other charges are being collected for providing other allied facilities/services therein viz. canteen food, parking space for vehicles, coaching, library, entertainment etc. merits exemption as stipulated under Notification No. 12/2017-State Tax (Rate)under Serial No. 14, Chapter 9963. This amount received for such supply by the applicant falling under tariff heading 9963 qualifies being treated as nil rate tax exempted supply.
|In view of the author, whether a lump sum amount is being charged the service of food, parking or other ancillary services are supplied in conjunction with the accommodation service. Such supply would be ‘composite supply’ and the principal supply in such a case would be ‘accommodation services’. All the other facilities would be interrelated and ancillary. As per the provisions of composite supply GST rate on composite supply will be equal to the GST rate applicable to the principal supply of such goods and services. Hence, composite supply of PG services would be exempt from levy of GST.|