Hostels and Paying Guest Facility – Whether or Not Liable Under GST

CA Srikantha Rao T

GST on Hostels & Paying Guest Facility – Recent Court Verdicts Worth Noting

The issue of taxability of services provided by hostel operators and paying guest accommodation facility operators has been simmering for quite sometime now ever since introduction of GST in 2017. The stance of the Revenue has been that letting out of property used for such facility by the owner to an operator who operates the facility should not be exempted from GST owing to the fact that he does not occupy the premises himself for use as his residence. The Karnataka High Court a few years ago in Taghar Vasudeva Ambrish Vs Appellate Authority for Advance Ruling Karnataka (W.P 14891 of 2020 (T-RES) decided on 7^th Feb. 2022) had settled the matter in favour of the assessees holding the view that the exemption Notification itself did not specifically require the lessee itself to use the property for residential purpose. The property in question also qualified as residential dwelling and the usage was for residential purposes.

We also had the verdict of the Supreme Court in Government of Kerala Vs Mother Superior Adoration Convent (Civil Appeal Nos. 203-207 of 2012 decided on 01^st March 2021) in the context of exemption from building/luxury tax under Section 3(1)(b) of the Kerala Building Tax Act 1975 for buildings used principally for housing nuns and hostels used for housing students holding the view that such exemption was based on user of the property and not ownership. The court had held that based on the object of exemption, buildings which were used for purposes integrally connected with religious or educational activity were within the scope of the exemption contained in Section 3(1)(b) of the Act. If nuns were living in a neighbouring building to a convent only so that they could receive religious instruction there, or if students were living in a hostel close to the school or college in which they were imparted instruction, it was obvious that the purpose of such residence was not to earn profit but residence that was integrally connected with religious or educational activity.

Now in the last one month or so, we have had two decisions i.e. one by the Madras High Court in the context of property tax on hostels for working individuals and now by the Supreme Court upholding the view taken by Karnataka High Court In Taghar Vasudeva Ambrish case (supra). Just before this, we have had the Andhra Pradesh High Court in M/s Nspira Management Services Private Limited Vs Deputy Commissioner of Central Tax Nellore & UOI (WP 18287 of 2024 decided on 26^th Sept. 2025) allowing refund of the GST paid to landlord by the assessee on rentals of hostel accommodation facility which it provided to students of the educational institution it was managing.

Hostel for working individuals

The Madras High Court in Mrs. M Divya Vs The Senior Revenue Officer Greater Chennai Corporation (WP 10194 of 2025 decided on 7^th Nov. 2025) has held the view that the question of nature of property for the purpose of subjecting the same to property tax, water and electricity charges has to be decided based on actual usage of the same by the residents/occupant and not based on business of the provider.

The Court has confirmed that hostels for working men and women could not be treated differently from apartments when it came to apply taxes at residential rates. Treating hostels as commercial units would clearly result in discrimination against the poor/weaker sections of the society and would violate Art. 14 of the Constitution of India.

While imposing taxes, such as property tax, water tax, water charges and electricity charges, every hostel room has to be verified as to whether the activities carried out therein are residential in nature. The hostel rooms, which were used by working men/women or student as sleeping apartment after their avocation, has to be considered as “residential unit” as per the Court. This decision also has relevance to GST especially if we consider explanation 2(a) to entry 12 of Notification 12/2017 Central Tax (Rate) and entry 13 of Notification 09/2017 Integrated Tax Rate. This explanation keeps “accommodation services for students in student residences” outside the purview of exemption under the main entry. This entry exempts from GST, “Services by way of renting of residential dwelling for use as residence except where the residential dwelling is rented to a registered person”. The said explanation could be seen to discriminate against students when compared to others.

This should be violative of Art. 14 of the Constitution of India and would therefore merit a judicial review. Moreover, introduction of an Explanation in plenary or subordinate legislation cannot be used as an artifice or a guise to expand or reinvent original provision (Interglobe Aviation Ltd. Vs Principal Commissioner of Customs ACC (Import) New Customs House New Delhi (WP (C) 934 of 2023 decided on 4^th March 2025 (Del. HC)). Luckily, most could be covered under the subsequent entry in both the aforesaid Notifications which deals with exemption to GST on “Supply of accommodation services having value of supply less than or equal to twenty thousand rupees per person per month provided that the accommodation service is supplied for a minimum continuous period of ninety days.”

Supreme Court Confirmation

The Supreme Court in The State of Karnataka & Anr. Vs Taghar Vasudeva Ambrish & Anr. (Civil Appeal 7846 of 2023 decided on 4^th Dec. 2025) following an appeal by the Revenue against the verdict of the Karnataka High Court earlier, has basically agreed with the conclusions of the High Court in favour of assessee. Following the purposive interpretation, the Court was of the view that giving Entry 13 a narrow interpretation by holding that it is available only when the property so rented is used by service recipient/lessee i.e, M/s DTwelve Spaces Private Limited themselves would ultimately lead to legislative intent being defeated as the exemption is extended to cases wherein residential dwelling is rented out and ultimately used as residence, irrespective of the person using it. The legislative intent behind this exemption clause is that a rented property, that is used as residence should not suffer 18% GST or IGST. However, if Entry 13 is given such a narrow interpretation, then, exemption will not be available in cases where a lessee has sub­leased the property for use as residence. It is well settled that what is a lease between the owner of a property and a tenant becomes a sub-lease when it is entered into between the tenant and his sub-tenant.

In the present matter, 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 was levied on the transaction between the operator i.e, M/s DTwelve Spaces Private Limited and the lessee, the same would be passed on to the students and working professionals which would ultimately lead to a situation where legislative intent behind granting exemption for residential use would be defeated.

The Court also confirmed that exemption envisaged under Entry 13 is an activity specific exemption and not person specific exemption. There are many exemptions given under GST law which are person specific exemptions and are applicable only when service provider or recipient is among the notified category of persons. On the other hand, there are many exemptions which are activity specific exemptions whereby an activity is given an exemption, and such exemptions are not dependent on the person using the service that is exempt. Once the property in question qualified as residential dwelling and the same was meant for use as residence by the individuals ultimately occupying the same, exemption could not be denied.

At this point one should note that any taxation scheme has to be reasonable. The Supreme Court in Commissioner of Trade Tax UP Vs S.S Ayodhya Distillery (Civil Appeal Nos. 6938-6939 of 2008, decided on 02^nd Dec. 2008 (SC)) has confirmed that reasonable taxation is part of doctrine of good governance. In Union of India Vs Nitdip Textile Processors Pvt. Ltd (Civil Appeal No. 2960 of 2006 decided on 03^rd Nov. 2011 (SC)), the Supreme Court had elaborated on this concept as follows – “To sum up, Article 14 does not prohibit reasonable classification of persons, objects and transactions by the Legislature for the purpose of attaining specific ends. To satisfy the test of permissible classification, it must not be “arbitrary, artificial or evasive” but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the Legislature. The taxation laws are no exception to the application of this principle of equality enshrined in Article 14 of the Constitution of India. However, it is well settled that the Legislature enjoys very wide latitude in the matter of classification of objects, persons and things for the purpose of taxation in view of inherent complexity of fiscal adjustment of diverse elements. The power of the Legislature to classify is of wide range and flexibility so that it can adjust its system of taxation in all proper and reasonable ways. Even so, large latitude is allowed to the State for classification upon a reasonable basis and what is reasonable is a question of practical details and a variety of factors which the Court will be reluctant and perhaps ill-equipped to investigate. It has been laid down in a large number of decisions of this Court that a taxation Statute, for the reasons of functional expediency and even otherwise, can pick and choose to tax some. A power to classify being extremely broad and based on diverse considerations of executive pragmatism, the Judicature cannot rush in where even the Legislature warily treads. All these operational restraints on judicial power must weigh more emphatically where the subject is taxation. Discrimination resulting from fortuitous circumstances arising out of particular situations, in which some of the tax payers find themselves, is not hit by Article 14 if the legislation, as such, is of general application and does not single them out for harsh treatment. Advantages or disadvantages to individual assessees are accidental and inevitable and are inherent in every taxing Statute as it has to draw a line somewhere and some cases necessarily fall on the other side of the line.” This principle in our view can prevent one from segregating/discriminating working individuals and students from others when it comes to benefit of exemption.

The Court then went on to comment based on the amendment in the Notifications effective from 18^th July 2022. While it had upheld the purposive interpretation prior to amendment, it went by the amendment in the exemption clause denying exemption where the residential dwelling was let out to a registered person. This was for the period post the amendment. The Court here has gone by the plain meaning of the clause in the Notifications post amendment.

The Court’s view for the period prior to amendment in terms of exemption being activity specific and being irrespective of the person using it could be seen in terms of the understanding of terms “use” and “usage”. The term “use” as per P Ramanatha Aiyar’s Advanced Law Lexicon (Pg. 5012 Vol. 4 Fourth Edition Published by LexisNexis Butterworths Wadhwa Nagpur) goes thus – “The Random House Dictionary defines the word ‘use’ as ‘to employ for some purpose’ ‘put into service’ ‘making use of’. In Oxford Dictionary, the word ‘use’ has been defined as ‘using’ ‘employment’ ‘application to a purpose’ ‘availability’ ‘utility’ ‘purpose for which things can be used’ as cited in Ravi Shankar Sharma V State of Rajasthan AIR 1993 Raj 117, 125.

As per Page 1710 of Black’s Law Dictonary 4^th Edition, the term “use” means to make use of, to convert to one’s service, to avail one’s self of, to employ. This has to be read with rest of the phrase in the Notification and it clearly means the property in question being actually used as residence. The term “usage” as per Pg. 5010 of P Ramanatha Aiyar’s Advance Law Lexicon Vol. 4, 4^th Edition, is merely a customary or habitual practice; a ‘convention’ is a practice that is established by general tacit consent. ‘Usage’ denotes something that people are accustomed to do; ‘convention’ indicates that they are accustomed to do it because of a general agreement that it is the proper thing to do.

As per Pg. 1709 of Black’s Law Dictionary 4^th Edition, the term “usage” in its most extensive meaning, includes both custom and prescription; but, in its narrower signification, the term refers to a general habit, mode, or course of procedure. A usage differs from a custom, in that it does not require that the usage should be immemorial to establish it; but the usage must be known, certain, uniform, reasonable, and not contrary to law. (Lowry V. Read, 3 Brewst. (Pa.) 452). The concept of custom and prescription has been explained on Pg. 221 of Jurisprudence by Sir John Salmond (Eighth Edition by C.A.W Manning Published by Sweet & Maxwell Limited London). Custom is long practice operating as a source of law; prescription is long practice operating as a source of rights.

Conclusion:

The concept of end use or actual usage for residence has rightfully received attention in this case in providing relief to the assesssee. It is also a fact that business practice in this sector has also seen changes over the years and the concept of convention and/or custom i.e. in terms of use or usage of property could also be subject matter of discussion moving forward in light of these changes. What is also important is to see if the animus domini is sufficiently realized at owner’s end based on the contractual terms in each case. This is because there are three kinds of mediate possession – (1) Where immediate possession is held by another but on one’s/owner’s own account (2) Where direct possession is held by another on owner’s account as well as his own account but where superior right/title of owner is acknowledged such that direct possession could be obtained by him anytime and (3) Immediate possession is with another who claims it for himself until some time has elapsed or some condition has been fulfilled but who acknowledges the title of owner for whom he holds the thing, and to whom he is prepared to deliver it when his own temporary claim has come to an end. (Pg. 310 of Jurisprudence by Sir John Salmond (Eighth Edition by C.A.W Manning Published by Sweet & Maxwell Limited London). The Courts depending on the scenario could conclude differently in the cases above.