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Arjun (Fictional Character): Krishna, recently Government have issued a circular in relation to tenancy right what exactly has been mentioned in this in this Circular?

Krishna (Fictional Character): Arjuna, as you know, sale of immovable property like land and building is not chargeable to Tax under GST. Also renting of residential property is Exempt from the levy of tax. But renting of commercial properties like shops, offices, etc, are taxable. Taxpayers were in confusion that transfer of tenancy rights against premium should be liable to GST or not. Hence, to clarify this issue the department has come up with this circular.

Arjun: Krishna, what is taxability of the transfer of tenancy rights against tenancy premium?

Krishna: Arjuna, the transfer of tenancy rights against tenancy premium popularly known as “pagadai system” wherein the landlord is the owner of the property but the possession of the property is with the tenant for which he gives periodic rent to the landlord but the tenant also has an option to sell the tenancy rights of the said property. The consideration received for the transfer of such right is taxable under GST.

Arjun: Krishna, are there any exceptions for the above

Krishna: Arjuna, there are two exceptions for the above consideration taxability

  1. When rights are transferred in relation to residential property then no GST is charged on it which means only commercial properties right transferred are chargeable to GST
  2. Upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service by way of granting of long term lease of thirty years, or more) of industrial plots or plots for development of infrastructure for financial business, provided by the State Government Industrial Development Corporations or Undertakings or by any other entity having 50 per cent. or more ownership of Central Government, State Government, Union territory to the industrial units or the developers in any industrial or financial business area.

Then amount received against the transfer of tenancy rights, would not be liable to GST as it is exempt.

Arjun: Krishna, can you elaborate the same?

Krishna: Arjuna, for example CIDCO gives a plot on the lease for 99 years to Mr ‘A’, then no GST would be leviable on the tenancy premium received by CIDCO, being a government body.

But when same rights are transferred by Mr. ‘A’ to Mr. ‘B’ against tenancy premium/ amount, GST would be leviable on such consideration received by Mr. ‘A’, as namely-

  1. Mr. ‘A’ is non government body.
  2. The property is not a residential property.
  3. The tenancy rights/ possession are being transferred and not the ownership of the immovable property which lies with CIDCO.

Arjun: Krishna, What lesson the taxpayer should take from this?

Krishna: Arjuna, while renting or transferring the rights of the property, taxpayer should take due diligence that to whom the tenancy right is being transferred, type of property for which rights are being transferred (Commercial and residential) and applicability of the GST on the Same.

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4 Comments

  1. ca vivek kochar says:

    Sir, great Article on lease, i am facing a case in which my client has taken on lease of 60+ years plot of land from a development authority formed under state govt. but they are demanding gst @ 18% on same, and to affirm that they are quoting the recent judgement of Bombey High Court in cidco case where it was upheld claining gst on lease is in accordance with law.. please elaborate

  2. r.jeevanantham says:

    useful information. I want clarification in the following issue.In respect of contractors it comes under Service. A contractor undertake laying of contract work during 2016 and he completed the work during 2018 as per the agreement. At the time of contract there is no mention of GST. After 1-7-17, Govt. Departments issues contract amount without deduction TDS. Now the contract amount received by the contractors is liable to GST at 12%. No TDS made. As there is no deduction of tax for the work as per the agreement entered during VAT regime. If 12% levied, the tax burden is heavy and they are unable to pay the same. In such cases what is the procedure. with regards.

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