GST on renting of residential and commercial property

Summary: The Goods and Services Tax (GST) has introduced distinct regulations for renting residential and commercial properties in India. Generally, rentals for residential properties are exempt from GST unless the property is rented to a registered person. In such cases, the registered tenant must discharge GST under the Reverse Charge Mechanism (RCM). As of July 18, 2022, this provision applies to residential rentals from any person to registered individuals. Conversely, commercial rentals are subject to GST, and a recent amendment effective October 10, 2024, expands the RCM to include rentals of commercial properties when rented by unregistered persons to registered persons. This change aims to mitigate revenue loss identified by the GST Council during its 54th meeting. The taxability of rentals is clarified through various scenarios: exempt rentals occur when an unregistered supplier rents residential property to another unregistered individual; forward charge mechanisms (FCM) apply when registered suppliers rent to unregistered recipients; and RCM is applicable for rentals between registered persons. To further clarify these provisions and interpretations, additional guidance from the CBIC is anticipated. Understanding these distinctions is crucial for landlords and tenants to navigate the complexities of property rentals under the GST framework.

Introduction: The Goods and Services Tax (GST) has significantly transformed the taxation landscape in India, impacting various sectors, including real estate. When it comes to renting properties, the GST implications differ for residential and commercial spaces. While residential property rentals are generally exempt from GST under certain conditions, GST applies to commercial rentals, affecting both landlords and tenants. This article delves into the GST framework on property rentals, highlighting taxability, exemption and compliance requirements for property owners and businesses alike. Understanding these provisions is crucial for navigating the complexities of renting under the GST regime.

EXEMPTION ENTRY
As per Entry No. 12 of Notification No. 12/2017-Central Tax(Rate) dated 28-06-2017, Service by way of renting of residential dwelling for use as residence are exempt from levy of GST.

However, no such exemption is available in case where the residential dwelling is rented to a registered person.

RCM ENTRIES

As per Entry No. 5AA of Notification No. 13/2017-Central Tax(Rate) dated 28-06-2017, Service by way of renting of residential dwelling by ANY PERSON to a registered person is subject to Reverse Charge Mechanism (‘RCM’). This entry was applicable w.e.f. 18th July 2022.

The above entry implies that the registered recipient, availing services of renting of residential property, is supposed to discharge GST on RCM basis. In this case RCM is applicable even if the supplier is unregistered or the property is used for commercial purposes.

Recently, Entry No. 5AB is added to the Notification for levying RCM on commercial properties. The said entry states that RCM is applicable on Service by way of renting of any property other than residential dwelling by unregistered person to a registered person. This entry is applicable w.e.f. 10th October 2024.

Notably, Entry No 5AB was introduced pursuant to recommendations made by GST Council in its 54th meeting held on 9th September 2024 wherein it was recommended to bring renting of commercial property by unregistered person to a registered person under Reverse Charge Mechanism (RCM) to prevent revenue leakage.

On a combined reading of Entry No. 5AB with the relevant GST Council recommendations, it can be inferred that Reverse Charge Mechanism (RCM) is applicable on the rental of commercial immovable properties (such as offices, shops, warehouses, malls, etc.) when rented by an unregistered person to a registered person. However, an alternative interpretation suggests that RCM may apply to all types of commercial properties, including movable ones. This alternative interpretation stems from the words ‘any property’ as stated in the entry.

In this context, further clarification from the CBIC is awaited to resolve the ambiguity.

VARIOUS SCENARIOS OF TAXABILITY

The above discussion is summarised in tabular format for easy and better understanding of the aforesaid provisions.

The below table summarizes leviability of GST on renting of residential property in various scenarios:

The below table summarizes leviability of GST on renting of commercial property in various scenarios:

FCM: Tax is to be paid by supplier under Forward Charge Mechanism

RCM: Tax is to be paid by recipient under Reverse Charge Mechanism

Disclaimer:
The information contained herein is not intended to be a source of advice and it is only for the convenience and educational purposes for the user. This is not an opinion to anyone and author is/ will not be responsible to anyone for any matter whatsoever regarding any reliance placed on this article.