The case examines GST exemption on renting of residential dwellings under Entry 12 of Notification No. 12/2017-CTR and emphasizes purposive interpretation over strict literal interpretation. The dispute arose when exemption was denied for leasing a residential property to a company operating it as a hostel for students and working professionals. While the authority initially rejected the exemption, the High Court and subsequently the Supreme Court upheld it, holding that the exemption is activity-specific and depends on use of the property as residence, not on the identity of the recipient. The Court clarified that “residential dwelling” includes premises used for long-term accommodation such as hostels, and that denying exemption would defeat legislative intent by increasing cost for occupants. It reaffirmed that once eligibility is established, exemption provisions should be interpreted liberally. However, post-18 July 2022 amendment, exemption is not available where the property is rented to a registered person, shifting GST liability under reverse charge.
Supreme Court says residential property let out for residential use is exempted from GST (No GST on renting of building to hostels)
Before claiming any exemption under a notification, we should bear in mind the following jurisprudence developed on this subject over a period of time.
√ If there is any ambiguity in the exemption notification benefit of such ambiguity cannot be claimed by the assessee, and it must be interpreted in favour of the revenue department – Dilip Kumar and Company v. Commissioner of Customs (Import) Mumbai [2018- TIOL-302-SC-CUS-CB]
√ The objective of exemption should be seen rather than a literal interpretation – Government of Kerala & Anr. v. Mother Superior Adoration Convent [2021 SCC Online SC 151]: TS-131-SC-2021-NT
√ The ratio in Dilip Kumar and Company will apply only for general exemptions in taxing statute but not for exemptions granting either incentive for promoting economic growth or otherwise has some beneficial reason behind it
√ The exemptions can be broadly classified in to following 3
-
- Supplier Specific Exemption: Applicable to the type of suppliers mentioned in the exemption list
- Supply Specific Exemption: The exemption is applicable for any supplier who is doing specific supplies
- Recipient-specific exemption: Exemption is based on the ultimate recipient of the service
Section 11 of the GST Act specifies that where the government is satisfied that it is necessary in the public interest so to do, it may, on the recommendation of the council, by notification, give an exemption either absolutely or subject to such conditions
Conferring the powers from Section 11, the Government, in the interest of the public, on the recommendation of the council vide entry no.12 of Notification No. 12/2017-Central Tax (Rate) exempted services by way of renting of residential dwelling for use as residence.
By reading the above entry, we can understand that it is a Supply/activity-specific exemption where the property type and usage are relevant, but not the type of supplier and recipient. The following are the 3 conditions that can be inferred from the above entry.
- There must be a supply of services for renting
- The renting service must pertain to residential dwellings
- Such a residential dwelling must be used as a residence
Considering a practical scenario where a person named Taghar Vasudeva (Co-owner) has given a residential building on lease to a company M/s DTwelve Space Private Limited (lessee/DSPL) who in turn leased out the property as hostel to long term accommodation of students and working professionals with the duration of stay ranging from 3 months to 12 months.
Tagar Vasudeva has no clarity on eligibility of above exemption for this transaction therefore approached the advance ruling authority where AAR Ruled that the exemption is not available. Assessee challenged it a writ petition before Karnataka High Court and the high court held that exemption is available on the basis that the exemption entry is activity specific and it does not mandate the type of recipient.
Challenging the order of High Court, the Central Government filed SLP before Hon’ble Supreme Court on the following grounds
√ The property comprises 42 rooms by applying common parlance test can never qualify as residential dwelling.
√ The facts of the second limb between the lessee and the end consumer must not be factored for testing the supply of service between the lessor and the lessee, will not amount to rewriting the Notification. The Co- owners have no connection whatsoever with ultimate consumer. The recipient of supply must satisfy the condition precedent where it is not satisfied in first leg of the transaction.
The Apex Court has addressed the above issues raised by the department and made the following analysis
Residential dwelling
√ The residential dwelling has not been defined in the Act, but as per the Educational Guide dated 20.06.2012 it is any residential accommodation, but does not include hotel, motel, inn, guest house, campsite, lodge, house boat, or like places meant for temporary stay.
√ The Bombay High Court in Bandu Ravji Nikam (supra) held that by the very nature of the use of students hostel, it is only a residential user as hostel, is a house of residence or lodging for students and that just because the hostel owners charge some amount from the students, such accommodation cannot be treated as commercial or non-residential.
√ In common parlance ‘residential dwelling’ means any building, structure, or part of the building or structure other than offices or factories, that is used or intended to be used as a home, residence, or sleeping place by one person or by two or more persons maintaining a common household, to the exclusion of all others.
√ The materials on record further indicate that as per the Khatha Extract and layout plans and records available with the Bruhat Bangalore Mahanagara Palike, the plot and property is shown as residential in nature. Thus, based on the above any residential accommodation meant for long term stay can be referred to as “residential dwelling”
Purposive Interpretation
√ Entry 12 of the Exemption Notification does not mandate that the lessee must use the residential dwelling as its own residence. Giving any other interpretation would mean adding an additional condition to Entry 12.
√ The revenue has made narrow interpretation by holding that property so rented used by service recipient themselves would ultimately lead to the legislative intent being defeated as the exemption is extended to cases wherein residential dwelling is rented out and ultimately used as residence even for the purpose of the person using it. The rented residential property that is used as residence should not suffer 18% GST.
√ The objective of exemption should be seen rather than a literal interpretation –particularly when the entry has some beneficial reason behind it. Government of Kerala & Anr. v. Mother Superior Adoration Convent [2021 SCC Online SC 151]: TS-131-SC-2021-NT.
√ In Union of India v. Wood Papers Ltd. (1990) 4 SCC 256 it was pointed out that an exemption notification should be construed strictly at the threshold. But once the exception/exemption is applicable, then a liberal construction must be adopted. The ration of this judgment clearly applies to the present case
√ The principle of ‘purposive interpretation’ or ‘purposive construction’ is based on the understanding that the Court is supposed to attach that meaning to the provisions which serve the ‘purpose’ behind such a provision. The statutory interpretation of a provision is never static but is always dynamic. Though the literal rule of interpretation, till some time ago, was treated as the ‘golden rule’, it is now the doctrine of ‘purposive interpretation’ which is predominant, particularly in those cases where literal interpretation may not serve the purpose or may lead to absurdity. If it brings about an end which is at variance with the purpose of statute, that cannot be countenanced.
Conclusion: In the present matter, the property is a residential dwelling and the ultimate use of the property remained unchanged. In other words, it remained as ‘use for residence’ by students/working women. However, if 18% GST is levied on this transaction between the original lessor and the lessee, the same will be passed on to the students and working professionals, which would ultimately lead to a situation where the legislative intent behind granting an exemption for residential use is defeated. Also, the said exemption is activity-specific but not person-specific.
Action points for Taxpayers
√ Wherever the taxpayers had paid the GST to the government voluntarily or through GST officials, they can apply for a refund irrespective of the time limit.
√ Even though property is ultimately used for residential purposes, it should be established with sufficient records (municipal records, property tax, electricity bill, etc.) that it is a residential dwelling. There are many cases where the officials have categorized the residential properties as commercial for property tax assessment in these cases taxpayers should challenge the assessment and make it residential.
Entry Amendment w.e.f. 18th July 2022
With effect from 18th July 2022, the above entry has been amended as follows:
Services by way of renting of residential dwelling for use as a residence, except where the residential dwelling is rented to a registered person. It means when the property is given to a registered person, the exemption is not available, and the said transaction is covered under reverse charge, where the registered person (recipient) must pay GST under reverse charge. Therefore, in the above same scenario, if M/s. DSPL (original lessee) is registered under GST then exemption is not available to him and it must pay GST under reverse charge, but the same is not eligible for ITC since the subsequent transaction of letting to students is exempted and becomes cost to the entity.
In that case, the taxpayers must be cautious and may apply for cancellation of the registration where it has only rental income.
Author Bio
