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The dynamics of renting of residential property under GST has changed from 18th of July 2022. The exemption by way of service of renting of residential dwelling has been partially removed vide notification No. 04/2022-Central Tax (Rate) dated the 13th July, 2022 and the same has been included under RCM vide notification No. 05/2022-Central Tax (Rate) dated the 13th July, 2022 when provided to a registered person. An extract of the RCM notification has been provided below.

Entry No.

Category of Supply of Services Supplier of
Service
Recipient of
Service
5AA Service by way of renting of residential dwelling to a registered person. Any person Any registered
person.

Also Read: Renting of Property Under GST

The implication of the recent changes relating to renting of a property has been enumerated below.

>  Services by way of renting of residential dwelling for use as residence would be exempted only if the said service is provided to unregistered recipient.

>  GST will be applicable if the residential dwelling is rented out to a registered person whether for residential or otherwise w.e.f. 18th July 2022. Liability to pay GST @ 18% under the reverse charge mechanism (RCM) will arise on the recipient (tenant).

For an easy understanding, the above mentioned implications have been tabulated below.

SN

Property Used for Recipient Earlier Now
1 Residential Residence Unregistered Exempt Exempt
2 Registered Exempt Taxable under
Reverse Charge
3 Residential Commercial Registered Taxable under
Forward Charge
Taxable under
Reverse Charge
4 Unregistered Taxable under
Forward Charge
Taxable under
Forward Charge
5 Commercial Commercial Any person Taxable under
Forward Charge
Taxable under
Forward Charge

Thus, a residential property given on rent to a registered person whether for residential or otherwise shall attract RCM provisions. Whereas if a commercial property is let out to a registered person, the same shall attract GST on forward charge. Thus, at the outset it is pertinent to understand whether the property on rent is residential property or not. For instance: What shall be the GST implication if a guest house is taken on rent by a registered person?

Furthermore, in case of unregistered entities nature of usage of the property plays a vital role to identify the taxability on rental services. Residential property taken on rent for residential usage shall be exempt, whereas if taken for commercial use shall be taxable under forward charge. For instance: What shall be the GST implication of a business operated in a residential dwelling?

In order to answer the above questions, it is important to first identify the following two factors:

a. Nature of the rented property -whether Residential or otherwise

b. Nature of use of such property (whether used for residential purpose or otherwise)

However, there is no mechanism suggested in GST laws as to how to identify either of the above, which has therefore created huge hue and cry in the industry. In this article, author has tried to identify means with the help of other existing tax laws or judicial pronouncements which can be used to determine the nature of property and its purpose.

a. How to determine whether a property is Residential or commercial: –

Residential dwelling/property is nowhere defined under GST law; however, references can be drawn from various municipal acts. As per The Kolkata Municipal Corporation Building Rules 2009, “Residential building” means, “any building in which sleeping accommodation is provided for normal residential purpose as the principal use with cooking facility or dining facility or both; such building shall include one or two or multi-family dwellings, hostels, apartment houses and flats; in case of hostels or dormitories attached to educational institutions there may or may not be any cooking facilities.”

The above definition identifies any building used for the purpose of accommodation whether as a flat or a hostel as a Residential building. Similarly, other municipal laws can be referred for determining a property as Residential.

Besides the above, there can be other factors which can be referred to determine whether a property is residential or commercial such as electricity bill, property tax etc. It may be noted in this regard that rate of property tax applicable for a commercial property is quite higher than that of a residential property. This holds good for all the states/UTs in India. Further, rate of electricity charges is also different depending upon the fact that whether property is being used for residential or commercial purposes. Hence, these documents may be useful in identifying whether a property is residential or commercial.

b. Nature of Use of property : –

Further, there is much confusion within the industry with regards to nature of use such as whether property used as guest house or property used by corporates for use as residence of its employees would be treated as used for residence or otherwise. This issue has already been raised and decided in many case laws.

Residential Dwelling Under GST – Unanswered Questions

In the case of R.K. Khanna vs New Delhi Municipal Council, the Hon’ble Delhi High court has dismissed the writ petition by concluding that “it cannot be said that the carrying on of the activity of guest house/transit quest house for use by the employees of a company, even where no charges are being levied, cannot be said to be a commercial activity.”

In the instant case, the petitioner is the owner of property and rented out the same to M/s. Glencore India Private Limited. The Assessing Authority wide order dated 27.12.1999 assessed the property and included the notional interest on advance rent as part of the report and further held that the property is to be construed as one being used as commercial guest house.

Further, in the case of N.D.M.C. vs Sohan Lal Sachdev, the Hon’ble Supreme Court has set aside the order of Delhi High Court that NDMC is not entitled to charge electricity and water charges on the basis of commercial use. In the instant case, Sohan Lal Sachdev, deceased, represented by legal representative, was the landlord of the premises. He occupied the ground floor of the said premises. he let out the first floor and the Barsati floor to Sachdeva Guest House for running a guest house. When this fact was intimated to the Corporation Authorities by the landlord, demands of electricity and water charges were made according to ‘non domestic rates’. The landlord protested against the demand stating that the user of the premises for running a guest house cannot be said to be a commercial use of the premises and therefore the demand is unsustainable. Thereafter, the landlord filed a suit seeking a decree of injunction against the NDMC restraining it from raising demand on the basis of commercial user of the premises on the ground as noted above.

Observations of Hon’ble Supreme court: – The Apex court observed that “it is the user of the premises by the owner (not necessarily absolute owner) which is relevant for determination of the question and not the purpose for which the guest or occupant of the guest house uses electric energy.”

Held: – The Hon’ble Supreme Court held that “The New Delhi Municipal Council is entitled to charge for use of electricity in Sachdeva Guest House at the rate applicable to ‘commercial’ use”.

Author’s Comments: – Apropos above, it may be concluded that whatever may be the use, if the residential dwelling is rented to a corporate to be used as guest house or used as residence for employees or otherwise, would fall under RCM as per Notification No. 05/2022-Central Tax (Rate) dated the 13th July, 2022. Further, one more important aspect is availability of ITC on such Residential Dwelling used as Guest Houses. In the case of National Aluminum Company Ltd., the Odisha AAAR has disallowed ITC on maintenance of guest houses. Hence, it can be said that ITC on such expenses is litigative. However, it may be noted that if it can be established that such expenses has a direct nexus with the operations of the company i.e. it is in the course or furtherance of business, ITC can be availed in terms of Sec 16 of the CGST Act 2017.

(Article is Authored Jointly by CA Rohit Surana and CA Sunayna Banthia)

Author Bio

Founder of CA Firm in 2009 which has grown from strength to strength, serving more than 50 clients. All India 19th rank in CA finals. Worked for 3 years in D.B. Desai & associates. Headed indirect taxation at Berger paints for 3 years before coming into practice. View Full Profile

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One Comment

  1. Mukesh Singh says:

    We need to clarification from GST council regarding availability of ITC on residential property in case of guest house and residence for employees.

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