Recently, there have been multiple ambiguities and confusions amongst taxpayers on deciding the state or union territory in which GST registration has to be obtained by a taxable person for rendering services by way of renting of immovable property.
In multiple cases, the immovable property which is rented out is located in one state and the supplier of the service is registered in a different state or union territory.
The following mutually exclusive questions arise in this regard:-
Can the supplier charge IGST from the state in which he is already registered?
Is he required to mandatorily obtain registration in the state in which immovable property is located ?
This analysis is an attempt to interpret the applicable legal provisions and clarify the same.
It is a general presumption amongst taxpayers and professionals that in so far as the service by way of renting of immovable property goes, the location of the supplier as well as the place of supply will always be one and the same i.e., where the property is located. In respect of renting of immovable property, a taxable person i.e., a lessor, can supply the service at no other place than where the property itself is located. Thus, the place where the property is located is the location of supplier of service. In accordance with the provisions of Section 8(2) of the IGST Act, therefore, the supply of service by way of renting of immovable property under all circumstances will be an intra-state supply chargeable to CGST and SGST.
Let us analyze whether the above presumptions are correct or can they be legally challenged on valid grounds.
Section 22(1) of the CGST Act with respect to Registration –
Every supplier shall be liable to be registered under this Act in the State or Union territory, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds the threshold limits prescribed
The phrase “from where he makes a taxable supply of goods or services or both” used in Section 22(1) of the CGST Act has been inserted by way of abundant caution by the legislature with the intention to guide the supplier as to in which state or union territory he has to take registration.
Especially the phrase “from where” used in Section 22(1) must be interpreted to be the location or place of business from where all or majority of the business decisions are being taken. It refers to the place where the seat of management and control of the person who will decide the activity of supply of goods or services or both is located.
The postulate follows Litera Legis that registration is required to be taken only at the place of business from where business is ordinarily carried upon.
Place of business as per Section 2(85) of the CGST Act includes–
(a) a place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods, supplies or receives goods or services or both; or
(b) a place where a taxable person maintains his books of account; or
(c) a place where a taxable person is engaged in business through an agent, by whatever name called;
Clause (85) of section 2 of the CGST Act 2017 uses the term “or” between the sub-clauses indicating that the place of business is indicated by the sub-clause which is most relevantly substantiated in terms of the facts of the case applicable to the taxable person. It is a settled principle of jurisprudence that usage of the term “or” in the statute indicates independent disjunction between the clauses in the sub-section.
In case of supply under GST, by way renting of immovable property, it is abundantly clear that the supply of rental services is consumed at that immovable property.
There is a clear distinction to be drawn between the place of consumption of services and the place from where the same is supplied.
Basis the enumerations above, place of business in case of supply of services by way of renting of immovable property will be the place from where routine operational business and management decisions are taken. The conclusion is supported vide usage of the words “from where the business is ordinarily carried on” in Section 2(85)(a).
The next question to be addressed is regarding the place of supply in case of renting of immovable property.
Section 12(3) of the IGST Act: –
The place of supply of services,-
(a) directly in relation to an immovable property, including services provided by architects, interior decorators, surveyors, engineers and other related experts or estate agents, any service provided by way of grant of rights to use immovable property or for carrying out or co-ordination of construction work; or
(b) by way of lodging accommodation by a hotel, inn, guest house, home stay, club or campsite, by whatever name called, and including a house boat or any other vessel; or
(c) by way of accommodation in any immovable property for organising any marriage or reception or matters related thereto, official, social, cultural, religious or business function including services provided in relation to such function at such property; or
(d) any services ancillary to the services referred to in clauses (a), (b) and (c),
shall be the location at which the immovable property or boat or vessel, as the case may be, is located or intended to be located.
Place of supply for renting of immovable property in terms of Section 12(3) of the IGST Act, 2017 accordingly is the location of the immovable property.
Place of business and place of supply cannot be understood synonymously. The place of supply of services will not determine the requirements of taking registration in a particular state in accordance with Section 22(1) of the CGST Act or Section 22(1) of the SGST Act but is to applied only for determining the nature of supply, whether it is interstate supply as per Section 7 or intra-state supply as per Section 8 of the IGST Act 2017.
Thus, it can be suitably concluded that there is no requirement to obtain registration in the state in which the immovable property is located.
With that being the case, the conclusion follows that the supplier has to raise an invoice from a different state in which he is registered to the recipient located in the state in which the immovable property is located, necessitating the charge of IGST.
For the same to qualify as an inter-state supply in terms of Section 7(3) of the IGST Act, 2017, the location of the supplier and the place of supply must be in two different states.
Section 7(3) of the IGST Act –
Subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in-
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of services in the course of inter-State trade or commerce.
We have already understood that place of supply [Section 12(3)] in the case of of renting of immovable property is the location of the property.
The next discussion to be made is what is the location of supplier of services.
Location of the supplier of services as per Section 2(71) of the CGST Act 2017 means –
(a) where a supply is made from a place of business for which the registration has been obtained, the location of such place of business;
(b) where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;
(c) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provisions of the supply; and
(d) in absence of such places, the location of the usual place of residence of the supplier;
Location of supplier of services for renting of immovable property as per Section 2(71)(a) read with Section 2(85)(a) of the CGST Act, 2017 thus means a place of business from where supply is made for which the registration has been obtained.
Place of business is the place from where business is ordinarily carried on as enumerated above.
Prima Facie, it thus appears that location of supplier is the place of business for which registration has been obtained.
But, as we saw in the introduction, the immovable property can be construed to be a fixed establishment. If that is so, as per the definition it can be said that location of supplier of services is the location of the fixed establishment i.e., location of the immovable property as per Section 2(71)(b).
This concern is thus of paramount importance requiring redressal.
Section 2(71)(c) and Section 2(71)(d) would not be relevant per se to our case for identifying the location of supplier for renting of immovable property.
Section 2(71)(b) presumes the pre-existence of a fixed establishment for determination of location of supplier of services.
“Fixed Establishment” as per Section 2(50) of the CGST Act, 2017 means:-
A place (other than the registered place of business) which is characterised by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services, or to receive and use services for its own needs;
Registered place of business and Fixed Establishment are two mutually exclusive concepts.
Vide usage of the conjunctive word “and” in the definition, it is clear that all of the stipulations specified in the definition are to be satisfied for invoking the definition of fixed establishment and in turn using the same under Section 2(71)(b) for determining the location of supplier of services.
The concept of fixed establishment under the GST Law is a rule of substance satisfying all of the following conditions of the definition:-
1. Sufficient degree of permanence
2. Suitable structure in terms of human and technical resources
3. Supply or receipt of services
In any general case, with respect to supply of services by way of renting of immovable property, condition 1 and 3 of the stipulations of the definition will be satisfied with respect to sufficient degree of permanence and supply of services.
Question still remains on whether condition 2 is generically satisfied for invoking the definition.
Neither the CGST, SGST, IGST Acts nor the Rules provide any detailed guidance on what is the scope of the expression “human and technical resources.” Since the concept has been borrowed from the erstwhile service tax regulations, guidance from the same can be resorted to.
Temporary presence of staff by way of a short visit at a place cannot be called a fixed establishment. Also, the number of staff at a location is not important. What is relevant is the adequacy of the arrangement (of human and technical resources) to carry out an activity for a consideration, or to receive and use a service supplied. Similarly, it will be important to evaluate the permanence of the arrangement i.e., whether it is capable of executing the task.
Temporary visit of staff to a place shall not make it a fixed establishment. Also, number of staff members deployed is not a relevant parameter to ascertain the structure.
Accordingly, where a supplier does not have any employee or personnel in the state in which immovable property is located, to attend to clients, maintain books, or any other related records, he fails to satisfy condition 2 and consequently fails to satisfy the entire definition since all the conditions have to be cumulatively be satisfied for invoking the definition as already enumerated above.
The following illustrations provided in the Service Tax Education Guide dated June 20, 2012 issued by the Central Board of Indirect Taxes and Customs (CBIC) provide guidance on what constitutes a fixed establishment.
- An overseas business house sets up offices with staff in India to provide services to Indian customers. Its fixed establishment is in India
- A company with a business establishment abroad buys a property in India which it leases to a tenant. The property by itself does not create a fixed establishment. If the company sets up an office in India to carry on its business by managing the property, this will create a fixed establishment in India.
The Service tax education guide from CBIC clearly clarifies that a mere existence of a property does not create a fixed establishment in any manner. What constitutes a fixed establishment is any other administrative office which has been set up for the purpose of management of the properties leased to the tenants. In the absence of any such offices set up in the state in which the immovable property is located, the standalone immovable property leased to tenants can in no way constitute a fixed establishment.
Under the Service Tax Law, the concept of Fixed Establishment sought to protect the Country’s tax base in a cross-border setting. In the GST regime the same concept has been deployed to safeguard the destination State’s right to collect GST. However, the destination state cannot assume extra territorial jurisdiction for levy. With the intentions of the fiscal statutes remaining the same, the interpretations and legal conclusions derived from the erstwhile service tax regime are squarely applicable as an external aid to interpretation in the instant case.
Accordingly, when the definition of fixed establishment itself is not met for the aforementioned reasons enumerated, recourse to sub clause (b) of clause (71) of Section 2 cannot be resorted to in any manner.
When the invocation of Section 2(71)(b) is outrightly ruled out, for reasons stated above, supply by way of renting of immovable property is grossly covered by sub-clause (a) of clause (71) of section 2 of the CGST Act, 2017, i.e., location of supplier is the place of business for which registration has been obtained.
Thus, from the above discussions, the following conclusions arise.
Location of Supplier – Place of Business for which Registration has been obtained
Place of Business – Place from where business is ordinarily carried on
Place of Supply – Location of Immovable Property.
Vide the explanations and conclusions enumerated, in the case of renting of immovable property, the location of the supplier and the place of supply are thus in two different states.
Accordingly, it follows that IGST has to be charged in line with Section 7(3) of the IGST Act, 2017.
Hence, there is no legal requirement for a registered person to obtain registration in each and every state in which he rents out immovable properties. It would be sufficient compliance if he charges IGST from the place of business for which he has already obtained registration.
Author Bio
Detailed discussion on renting of immovable property. very deeply discussed and resolve the ambiguity.Thanks
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