GST on renting of building as Paying Guest Accommodation or Hostel

Background:

The concept of Working Professional Hostels or Paying Guest accommodations is widely recognized in metropolitan areas with a higher population of young working individuals. Students and working professionals prefer to seek accommodation closer to their educational institutions or workplaces. In cities like Bengaluru and Mumbai, this concept is common and popular. Hostel accommodations are managed by enthusiastic landowners who aim to maximize returns from their immovable property. As a result, the hostel fees or PG rentals are slightly higher than the regular rentals for residential premises. The agreement typically includes a clause specifying a minimum period of stay ranging from 1 day to 11 months, depending on individual needs. Additionally, the fee often covers various modern amenities such as television, Wi-Fi, gym access, and more. Therefore, hostel accommodations are either managed by the landlord directly or sublet by the tenant of the original landlord. In some cases, landlords choose to mitigate operational risks by outsourcing the activity through subleasing or hiring an agent to manage it. It is a well-known provision under GST that premises leased out for residential purposes are exempted from taxation. Landowners, facing a dilemma regarding the applicability of GST, prefer to collect fees from tenants to avoid potential litigation. This article aims to comprehensively analyze the applicability of GST on hostel accommodation services, providing clarity and rationale from all perspectives.

The reason for the confusion and the need for clarity arises from the fact that if the hostel operations are managed directly by the landlord, they are typically considered a business activity. This classification is due to the requirement of obtaining a permit from State government authorities. Individuals conducting such activities are subject to regulation under The Hostel and Home for Women and Children (Regulations Act), as well as the Trade License or registration under the Shops & Establishment Act of the respective States.

Issue:

The primary concern regarding the applicability of exemption under GST on hostel accommodation revolves around determining whether the transaction qualifies as residential dwelling. Additionally, it is important to ascertain if there are any legal precedents supporting this interpretation.

Analysis:

As the term “Residential Dwelling” is not defined in the CGST Act, it is necessary to derive definitions from legal dictionaries. It is well settled rule of Statutory Interpretation of fiscal statues that the words used therein if not defined in the statute have to be interpreted in their popular sense.

The word ‘residence’ and ‘dwelling’ as defined in Concise Oxford English Dictionary 2013 Edition as well as BLACKS LAW DICTIONARY 6th Edition to ascertain its meaning in common parlance and in popular sense which read as under:

The Oxford Dictionary defines “ Domicile”

1. the country in which a person has permanent residence.
2. the place at which a company or other body is registered.

Residence:

1. the fact of residing somewhere.
2. a person’s home.
3. the official house of a government minister or other official figure.

Blacks Law Dictionary:

Residence– Place where one actually lives or has his home; a person’s dwelling place or place of habitation; an abode; house where one’ home is; a dwelling house.

Dwelling– The house or other structure in which a person or persons live; a residence; abode; habitation; the apartment or building , or a group of buildings, occupied by a family as a place of residence. Structure used a place of habitation

Before delving into the analysis of GST provisions, it is crucial to examine and prove that Hotel and Residential dwellings unit are interchangeable and the purpose of letting out both is one and the same. As far the governing statutes are concerned, there is a special exception available to Hostel to deem it a Residential Unit. Now let us analyse below points in detail:

1. Is a Hostel considered a Residential unit or a Hotel?
2. Is there any difference in the relationship between landlord and tenant vis a vis hostel owner and hostel inmate?
3. Does the Government view the transactions differently? 

Is a Hostel considered a Residential unit or a Hotel?

The duration of stay and purpose of stay are the differentiating factors between Hostel and Hotel.

The expression residence connotes that a person eats, drinks and sleeps at that place. The ownership of the place of residence is immaterial.[1]

The hostel is used by the students as residence. They use the hostel for sleeping, eating, and for the purpose of studies for a period ranging between 3 months to 12 months. In the hostels, the duration of stay is more as compared to hotel in guest house, club etc, which is typically starts from one day to weeks or at the maximum few months.

We infer from Sec. 2 , sub clauses of The Tamil Nadu Hostels and Homes for Women and Children (Regulation) Act, 2014,

(e)  “hostel” or “lodging house” means a building in which accommodation is provided for women or children or both, either with boarding or not;

 (d) “home for women and children” means an institution, by whatever name called, established or maintained or intended to be established or maintained for the reception, care, protection and welfare of women or children or both;  

Sec. 2 of Tamil Nadu Shops and Establishment Act, 1947 defines
(14) ‘residential hotel´ means any premises in which business is carried on bona fide for the supply of dwelling accommodation and meals on payment of a sum of money to a traveller or any member of the public or class of the public;

“clubs and residential hotels, hostels attached to schools or colleges, and establishments maintained in boarding schools in connection with the boarding and lodging of pupils and residents masters;” 

There is an exemption u/s 4(2) (c) from opening and closing hours as applicable to Shops as defined in Sec.7 and Sec.13 of the Act.

In the case of [2] in decision, para 25 , it was held that the work ‘dwelling house’ is synonymous with residential accommodation as distinct from a house of business, warehouse, office, shop, commercial or business premises. The word ‘house’ means a building. It would include the out-houses, courtyard, orchard, garden etc. which are part of the same house, but it cannot include a distinct separate house

In few cases, the term ‘dwelling house’ has been interpreted to mean even a single room as part of a house.

Therefore, from the above, though the term Hostel is used, it is meant for home for women and children with or without meals.

The accommodation which is used for the purposes of the hostel of students and working women is classified in residential category in the Revised Master Plan 2015 of Bangalore City.

Thus, it evident that the expression ‘residence’ and ‘dwelling’ have more or less the connotation in common parlance and therefore, no different meaning can be assigned to the expression ‘residential dwelling’ and it cannot be held that the same does not include hostel which used for residential purposes by students or working women. From the above provisions of the various act, the purposive interpretation can be summarised that, as long as the need of stay is more akin to the residential purpose, the Hostel can be termed as Residential Unit.

Is there any difference in the relationship between landlord and tenant vis a vis hostel owner and hostel inmate?

Let us examine whether the relationship of the contracting parties decides the nature of the underlying transaction.

The definition of Tenant is drawn from The Tamil Nadu Regulation of Rights and Responsibilities of Landlords and Tenants Act, 2017

Sec.2 (c) “landlord” means a person who, for the time being is receiving, or is entitled to receive, the rent of any premises, whether on his own account, or on account of, or on behalf of, or for the benefit of, any other person or as a trustee, guardian or receiver of any person or who would so receive the rent or be entitled to receive the rent, if the premises were let to a tenant, and shall include his successor-in-interest;

Whereas there is no specific exemption provided  for the Hostel buildings as contained in Sec.3

(a) any premises owned or promoted by the Central or State Government or Local Authority or a Government undertaking or enterprise or a statutory body or cantonment board;

(b) premises owned by a company, university or organization given on rent to its employees as part of service contract;

(c) any premises owned by religious or charitable institutions as may be specified by the Government, by notification;

(d) any premises owned by Waqf registered under the Waqf Act, 1995 or to any trust registered under the Indian Trusts Act, 1882;

(e) any other building or category of buildings specifically exempted in public interest by the Government, by notification:

Provided that any owner of the premises falling under clauses (a) to (d) wishes that the tenancy agreement entered into by them be regulated under the provisions of this Act, they may inform the Rent Authority of their desire to do so at the time of information of the tenancy agreement under section 4 of this Act.

The definitions above clarify that while hostels are governed by the registration requirements under the Shops and Establishment Act, which typically applies to commercial establishments, there are specific exemptions regarding the rules that apply to commercial shops. This distinction separates business owners from landlords renting out to Hostels.

Does the Government view the transactions differently?

As per The Tamil Nadu Regulation of Rights and Responsibilities of Landlords and Tenants Act, 2017, sec. 4

4.(1) Notwithstanding anything contained in this Act or any other law for the time being in force, no person shall, after the commencement of this Act, let or take on rent any premises except by an agreement in writing, which shall be informed to the Rent Authority by the landlord and tenant jointly, in the form specified in the First Schedule.

By the above provision, there is no specific exclusion has been created in the statute for the Hostel and Paying Guest accommodation.

From the information above, we deduce that the terms and relationship in typical transactions between a landlord and tenant are the same as those between a hostel owner and hostel inmate

The end users, inmates of Hostel use the  room allotted to them as their residential dwelling unit, which includes kitchen, wash room, cots and beds, so as to enable them to prepare food and wash clothes etc. The residential dwelling varies from person to person. As far as the homeless people are concerned, the residential dwelling will be wherever they are residing such as public roads, streets or in any other places and except the same, no other places can be provided, unless and otherwise if the Government has accommodated those people in a home, where they are maintaining the same for homeless. Therefore it depends upon the status and the lifestyle of each person, the nature of residential dwelling will vary.

The State Government levies property taxes at differential rates when let out for commercial and residential purposes. The end user of the building is the criteria for levying taxes by the Government namely whether it is for the purpose of residential or commercial.  In the case of Hostels, as the nature of end user of Hostel, is purely residential in character, the rates applicable for residential dwelling is levied by State Government authorities.

The zoning Regulations as specified in Rule 33 of Tamil Nadu combined development and building Rules,2019 wherein under the Residential Zone, Entry No (vii) is given “Woking zones hostels and old age homes”. The property tax categorises hotels in “residential zone” only.

Legal provisions under GST:

Sec.7(1) of the CGST Act, covers the rental as one of the forms of supply wherein Entry 5 (a) of Sch.II affirms renting of immovable property as Service. If the underlying transaction is in the course or for the furtherance of business then GST is applicable as per Entry No, 16 of CGST (R)  NN.11/2017- at the rate of 18% under HSN 9972.However, NN 12/2017, entry No, 12 clearly specifies “Services by way of renting of residential dwelling for use as residence” is exempted.

When the exemption notification is clear and the taxpayer wants to avail the benefit of the notification, the burden of proof lies on the taxpayer.

The owner is providing services as similar to any other residential property. The person who is staying also using the Hostel as same as residence. Hence, it tantamounts to residential dwelling for use as residence.

In his case, it is necessary to examine and interpret how the Exemption Notification can be applied in this scenario.

The inference can be drawn that interpretation of exemption notification is no longer res integra and the Constitution Bench of the Supreme Court in ‘DILIP KUMAR AND COMPANY AND OTHERS, held

66.1 Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification.

66.2 When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject / assessee and it must be interpreted in favour of the revenue.

66.3 The ratio in sun Export case is not correct and all the decisions which took similar view as in sun Export case stand overruled.

Hence from the above inference from allied laws and purposive interpretation of statutes and strict application of exemption notification, it can be concluded that, renting of Hostel or Paying Guest doesn’t attract levy of GST, as it falls under the Exemption list. This can be tabulated as below

Judicial precedence:

Sri. Thagar Vasudeva Ambrish filed an application vide KAR ADRG 17/2020 for advance ruling questioning the applicability of Exemption prescribed under Entry  No. 13 of the Notification Number 13/2017 IGST (R) dt 28.6.2017 while rendering leased services to M/s D Twelve Space Pvt Ltd., which in turn was engaged in affordable residential accommodation services to students. The Karnataka Advance Ruling Authority on 23.03.2020  ruled that leased services doesn’t fall under  the exemption and GST to be levied provided the lessee is registered under GST.

The petitioner thereupon filed an appeal under Section 100 of the CGST Act before the Appellate Authority for Advance Ruling, Karnataka (AAAR Karnataka). However, the AAAR Karnataka by an order dated 31.08.2020 in the case of Sri. Thagar Vasudeva Ambrish inter alia held that property rented out by the petitioner is a hostel building which is more akin to sociable accommodation rather than what is commonly understood as residential accommodation. Therefore, the property rented out by the petitioner cannot be termed as residential dwelling. It was further held that benefit of exemption notification is available only if the residential dwelling is used as a residence by the person who has taken the same on rent / lease. In the result, the appeal preferred by the petitioner was dismissed.

Aggrieved by the order, the applicant filed a Writ Petition under Art.226,  on 7^th day of February 2022, with Hon’ble High Court of Karnataka vide Writ Petition No. 14891 of 2020 (R-RES). The order passed by the AAAR Karnataka was quashed and held that services provided by the petitioner is entitled for exemption.

M/s Thai Mookambikaa ladies Hostel  runs a Hostel for girls and working women professionals and provides residential accommodation along with food at a reasonable rate without profit motive. It believed that  entry 12 of the Exemption Notification 12/2017-Central Tax, (R), is applicable and exempt from GST. It filed application for Advance Ruling before the Tamil Nadu State Appellate Authority AAAR vide application No.56/2023/ARA /dt.30.03.2023 . The order clarifying  the definition of ‘residential dwelling’ as outlined in the CBIC guide, ruled that a ‘Hostel’ does not align with the definition of ‘residential dwelling’, but can be categorized as ‘social accomodation’, akin to a hotel. It distinguished between ‘accomodation’ and ‘residence’, emphasizing that for the exemption to apply, two conditions must be met i.e. the renting of residential dwelling and its use as a residence. It was brought to the attention of the authorities that, in the earlier service tax regime,” services by way of residential dwelling for use as residence was included in the negative list under Sec.66D clause (m) of the Finance Act, 1994. Thus entry  under residential accommodation falls under unconditional exemption category. The Authorities held that, the applicant is not eligible for exemption and further, it is taxed @ 18% as composite supply, under HSN 9963 as Hostel accommodation services.

Aggrieved by the order, the M/s Thai Mookambikaa ladies Hostel  filed a Writ Petition in the High Court of Judicature at Madras, vide WPNo.28486 of 2023. Though statutory provision of Appeal was very much available, the applicant decided to file Writ with the understanding that, availability of alternate remedy will not take away the right since Appeal filing was believed to be an empty formality due to the ruling of AAAR in case of Sri. Thagar Vasudeva Ambrish, in Karnataka.

The Hon’ble High Court held that, purport and object of the legislation in issuing the present Notification is only to give exemption towards the services which are in residential nature and not towards commercial nature and the premises should be of residential dwelling for use as residence. The purpose of exemption given in the Notification is only to lessen the burden of tax on the   dwellers, who are the tenants/occupants of the residential premises taken on rent.

The GST Exemption Notification must be viewed from the recipient of service perspective and not from service provider. Further, the inmates of Hostel are using it for residential purpose and not for commercial hence the renting out the hostel rooms to the girl students and working women is exclusively for residential purpose and the petitioner is entitled for Exemption. The judgment of  Thai Mookambikaa Ladies Hostel vs Union of India & Ors., dated 22-03-2024 by Hon’ble Madras High Court was delivered on 22.03.2024.

Conclusion:

Based on the mentioned legal precedents, it can be inferred that renting out building premises to working professionals as Paying Guests is not subject to GST. The focus should be on how the end user perceives the transaction, rather than the service provider’s viewpoint. However, readers should exercise caution when applying these principles to direct taxes.

[1] KISHORE CHANDRA SINGH VS BABU GANESH PRASAD BHAGAT AIR 1954 SC 316

[2] V.L.Kashyap versus R.P.Puri, para 25