Issue related to taxability of ‘tenancy rights’ under GST Circular no 44/2018 – CT dt 02/05/2018
Facts: The transfer of tenancy rights against tenancy premium which is also known as “pagadi system” is prevalent in some States. In this system the tenant acquires, tenancy rights in the property against payment of tenancy premium(pagadi). The landlord may be owner of the property but the possession of the same lies with the tenant. The tenant pays periodic rent to the landlord as long as he occupies the property.
The tenant also usually has the option to sell the tenancy right of the said property and in such a case has to share a percentage of the proceed with owner of land, as laid down in their tenancy agreement.
Alternatively, the landlord pays to tenant the prevailing tenancy premium to get the property vacated. Such properties in Maharashtra are governed by Maharashtra Rent Control Act, 1999
Issues:
(i) Whether transfer of tenancy rights to an incoming tenant, consideration for which is in form of tenancy premium, shall attract GST when stamp duty and registration charges are levied on the said premium?
(ii) Further, in case of transfer of tenancy rights, a part of the consideration for such transfer accrues to the outgoing tenant, whether such supplies will also attract GST?
Objection by Industry: The stamp duty and registration charges is levied on such transfers of tenancy rights, and such transaction thus should not be subjected to GST.
Legal Provision:- As per section 9(1) of the CGST Act there shall be levied central tax on the intra-State supplies of services.
As per para 2 of Schedule II any lease, tenancy, easement, licence to occupy land is classified under supply of service.
Also renting of residential dwelling for use as a residence is exempt as per Sl. No. 12 of notification No. 12/2017-Central Tax(Rate).
Observations: Merely because a transaction or a supply involves execution of documents which may require registration and payment of registration fee and stamp duty, would not preclude them from the scope of supply of goods and services and from payment of GST.
The transfer of tenancy rights cannot be treated as sale of land or building declared as neither a supply of goods nor of services in para 5 of Schedule III to CGST Act, 2017. Thus a consideration for the said activity shall attract levy of GST.
Clarifications:
| Cases | Situations | Clarifications | Examples |
| 1 | Transfer of tenancy rights to an incoming tenant, consideration for which is in form of tenancy premium | Taxable | A is the owner of a property. B takes this property from A on rent. B pays Rs. 10,000 monthly to A as rent. In addition, B has paid Rs.1,00,000 to A to get a right partly in A’s property. This Rs. 1,00,000 is called Tenancy Premium and liable to GST |
| 2 | Transfer of tenancy rights to a new tenant against consideration in the form of tenancy premium | Taxable | A is the owner of a property. B takes this property from A on rent. B pays Rs. 10,000 monthly to A as rent. In addition, B has paid Rs.1,00,000 to A to get a right partly in A’s property.B has further transfer rights to C for premium. Such premium also Taxable. |
| 3 | Transfer of tenancy rights to a new tenant against consideration for residential property in the form of tenancy premium | Exempt | X is the owner of a residential property. Y takes this property from X on rent. Y pays Rs. 10,000 monthly to X as rent for residence . Before the end of the agreement, X pays Rs. 1,00,000 to Y, so that Y vacants the property. This Rs. 1,00,000 is also called Tenancy premium. Here X is paying Y so that Y surrenders his right to stay in the property. This will be exempt as the amount of tenancy premium paid for residential purpose. |
| 4 | Services provided by outgoing tenant by way of surrendering the tenancy rights against consideration in the form of a portion of tenancy premium | Taxable | X is the owner of a property. Y takes this property from X on rent. Y pays Rs. 10,000 monthly to X. Before the end of the agreement, X pays Rs. 1,00,000 to Y, so that Y vacants the property. This Rs. 1,00,000 is also called Tenancy premium and liable to GST. Here X is paying Y so that Y surrenders his right to stay in the property. |
Author Bio
Hello Vandana,
Nice Article.
If Assessee pay Tenancy premium to tenant who has occupied Commercial property & Compensation is more than Rs. 20L. IS GST payable on this ? If yes, Who will be liable to pay GST Owner or tenant ?
Hi Vandana, is surrender of tenancy rights against tenancy premium allowed under Delhi Rent Control Act?
In case of Transfer of Tenancy Rights (i.e. Long Lease Right) in Industrail area like GMDC, Whether Incoming Tenant is eligible for ITC on GST paid to Outgoing Tenant on Premium / Pagadi / Consideration ?
A Tenant gets a Flat in a Redeveloped Building in exchange of Tenancy Rights. Is GST attracted on this exchange? If yes, rate of GST?
Hi Vandana
If the tenant of a residential property surrenders the tenancy right to the landlord for a lumpsum consideration will the consideration be taxable under GST in the hands of the outgoing tenant?
Hi vandana,
If in point no 2 b transfers the tenancy right to c for residential
puposr then will it be exempt
Priti
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Hi Vandana, difference in b/w point 3 and 4 not clear.Can you please clarify. Thanks for writing!
Thanks for the Sharing Knowledge.