To Exempt or Not to Exempt? The Great PG/Hostel GST Dilemma

There was a bit of a panic in the industry (and by industry, we mean every PG or Hostel owner with a calculator and a headache) when Entry 14 of Notification No. 12/2017-Central Tax (Rate) was removed. Suddenly, the air was thick with confusion- “Are PG or hostel accommodations still exempt under GST? Or are we now in the tax trap?”

Now, if you’re wondering what this elusive Entry 14 even was and why it has hostel owners, tax consultants, and even some sleepy students suddenly wide awake- it’s time to unpack the story. Grab a cup of chai (or coffee, we don’t judge), and let’s break down this tax tale.

Background: Where It All Began – The Tale of Two Entries

To understand the current tax confusion surrounding PGs and hostels, we need to rewind a bit and look at two key exemption entries under Notification No. 12/2017-CT(R). These entries once provided a cozy tax shelter for many accommodation service providers, but one of them has now been evicted—causing quite the stir.

The following exemptions were available up to 17.07.2022:

1.Entry 12-Renting of residential dwelling for use as a residence.

2. Entry 14-Services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having “value of supply” of a unit of accommodation up to Rs. 1000/- per day or equivalent.

Until 17th July 2022, many PG and hostel accommodation service providers were comfortably availing exemption on accommodation services provided to individual residents/students/employees under Entry 14, especially if their per-day charges were up to ₹1,000. It was a clear and relatively uncontested space.

But then came the plot twist.

W.e.f. 18th July 2022, the exemption under Entry 14 was withdrawn via Notification No. 4/2022-CT(R). This removal of Entry 14 triggered an important question that’s now doing rounds across tax desks and PG/hostel counters alike:

Can PG/hostel accommodation still be exempt? And if yes, can we now rely on Entry 12 instead?

And that, dear reader, is exactly what we’re about to explore in the rest of this article.

Discussion on claim of exemption under entry 12:

As per Notification No. 4/2022-CT(R) issued on July 13, 2022, which amended the exemption notification 12/2017-CT (Rate), the following has been brought into the tax net w.e.f. July 18, 2022: [Amendment of entry 12]

The relevant extract of the amended entry 12 is as follows:

Heading 9963 or Heading 9972 “Services by way of renting of residential dwelling for use as residence, except where the residential dwelling is rented to a registered person“.

Heading 9963 covers room or unit accommodation services hostels, camps, paying guest and the like. Heading 9972 covers rental or leasing services concerning residential properties by owners or lease holders houses, flats, apartment buildings, multiple-use buildings that are primarily residential, residential mobile home sites.

Since the exemption at entry 12 is covering both the headings 9963 and 9972, many PG or hostel or unit accommodation services providers were claiming exemption on renting of residential units to individual students/residents, i.e., unit accommodation services provided by them, under entry 12.

However, the tax authorities have held a differing perspective, contending that PG/hostel accommodation services do not qualify under Entry 12. This discrepancy has resulted in calls for the imposition of GST on PG/hostel or unit accommodation services.

Therefore, to bring in this clarification, it was discussed in the 53rd GST Council Meeting based on Fitment Committee’s recommendations “To create a separate entry in notification No. 12/2017- CTR 28.06.2017 under heading 9963 to exempt accommodation services having value of supply of accommodation up to Rs. 20,000/- per month per person subject to service is supplied for a minimum continuous period of 90 days.

Discussion in the Fitment Committee and its recommendations:

1.Earlier, hotel accommodation having tariff of Rs. 1000 per day or less was exempt from GST. Private hostels charging Rs. 30000 or less per month were availing benefit of this exemption.

2. Based on the recommendations of GoM on rate rationalization in the 47th GST Council meeting held in June, 2022, this exemption in respect of hotel accommodation having tariff of Rs. 1000 or less per day was withdrawn with effect from July, 2022.

3. Thereafter private hostels started claiming exemption applicable to renting of residential dwelling for use as residence, as per entry at Sl. No. 12 of notification No. 12/2017 – CTR.

4. The Hon’ble Karnataka High Court order dated 03.02.2022 in the case of Taghar Vasudeva Ambrish held that residential dwelling includes hostels. An appeal has been filed and is pending before Hon’ble Supreme Court of India.

5. As per Annexure to notification No. 11/2017- CTR dated 28.06.2017, accommodation services provided by Hotels, Inn, Guest houses, Clubs & the like are classified under SAC 9963. Other accommodation services such as student residences, hostels, Camps, Paying Guest and the like are also classified under the same heading.

6. Further, in the Explanatory notes to the Scheme of Classification of Services, it is clearly mentioned that the service code 997211 does not include accommodation service such as school dorms etc

7. Service by way of hostel accommodation, service apartments/ hotels are not classified under heading 9972 and thus, it is not a service of renting of residential dwelling for use as residence which is exempt under entry no. 12 of the notification No. 12/2017-CT (Rate) dated 28/06/2017.

8. Recommendations:

• • A new entry may be inserted under Heading 9963 in the exemption notification to exempt supply of accommodation services upto Rs.15000/- per bed, per person per month provided the accommodation service is supplied for a minimum continuous period of 90 days.
  • To add explanation to entry 12.
  • Chapter heading 9963 may be deleted from Column No. 2 in the Sl. No. 12 in the notification No. 12/2017- CT (R).

Further, there was a clarificatory circular 228/22/2024-GST setting out that, as recommended by the GST Council, the GST liability on accommodation is regularized on an “as is, where is basis” for periods 1.7.2017 to 14.7.2024 where the value of accommodation is less than or equal to Rs.20,000 per person per month and such accommodation is provided for a minimum continuous period of 90 days.

The term ‘as is where is’ basis would mean, those who paid demands won’t get refunds, while those in disputes will benefit.

With regard to this council meeting CBIC vide Notification No. 04/2024-CT(R) amends Notification No. 12/2017-CT(R) as follows –

Until July 14, 2024, Sl. No. 12 of Notification No. 12/2017 CT(R) covered Heading 9963 as well as Heading 9972. However, after the amendment, with effect from July 15, 2024, the exemption entry 12 covers only services classifiable under Heading 9972.

Also, explanation 2 has been inserted for entry 12 with a non-obstante clause stating that accommodation services for students in student residences, as well as accommodation services provided by hostels, camps, and paying guest accommodations, shall not be covered under entry 12.

 From the above explanation 2, it is clear that PG/hostel businesses can no longer claim exemption under entry 12 w.e.f. 15th July 2024 which means only new entry 12A is applicable for PG/hostel service providers.

Therefore, hostel or unit accommodation service providers are now eligible to avail the exemption under the newly introduced Entry 12A, subject to compliance with the prescribed conditions.

Entry 12A: Clarity or Just Another Twist?

To clear the confusion after Entry 14 was removed, the government brought in Entry 12A-supposedly to make things easier for hostel and PG owners. It was meant to be the solution, the final answer. But guess what? Instead of solving the problem, it brought in a brand new one! Yep, just when everyone thought the confusion was over, another twist showed up. You might be wondering, “Seriously? What’s the issue this time?” Don’t worry, friends- let’s understand this new confusion with a simple practical example.

Let’s consider a practical scenario: A college enters into an agreement with a building owner to rent a premises for accommodating its students wherein students period of stay would be minimum of 1 year. The arrangement is such that the college pays the building owner on a per-student basis (I.e., Rs. 15,000 per students). This brings us to an important question- can the building owner claim GST exemption on the accommodation service provided to the college under such an arrangement?

Before analyzing the availability of exemption, it is crucial to first determine the nature of the service being provided- is the building owner offering a mere renting service, or is it a unit accommodation service being extended to the college? This distinction plays a key role in deciding the entry (12 or 12A) under which the exemption is available.

Classification of service provided by Building owner (BO) to college:

If BO rents the entire building to college as a whole, whereby college assumes full control and responsibility for the premises, and BO has no further obligations to provide food, maintenance, housekeeping, security, or any other ancillary services, in such a scenario, services of BO would get covered under SAC 9972 ‘Real Estate Services’ which includes services of rental or leasing services concerning residential properties by lease holders houses, flats, apartment buildings, multiple-use buildings that are primarily residential, residential mobile home sites.

However, in the present case, lets assume that the control over the building would remain with BO (building owner), as it is obligated to provide maintenance, housekeeping, security, and other ancillary services to students of college. Accordingly, the services rendered by BO would fall under the category of ‘unit accommodation services’ as per Service Accounting Code (SAC) 9963.

The word ‘unit of accommodation’ is not defined in the GST law or in exemption notification. In author’s view, it could cover renting of any of the premises to a student, employee, etc i.e. qua the service receiver i.e. per customer.

Hence, it can be concluded that renting of residential units on per person/receiver basis would be covered under the meaning of unit accommodation services. Consequently, services of BO in such scenario would get covered under Group 99632 ‘Other Accommodation services’ which includes accommodation services for persons for a longer period of time and also includes semi-permanent residence in boarding houses and residential clubs.

Consequently, BO (building owner) can claim exemption under entry 12A (Heading 9963) provided it satisfies the following conditions:

1. Condition 1: Value of supply of accommodation is less than or equal to Rs. 20,000/- per month per person.

2. Condition 2: Accommodation service is supplied for a minimum continuous period of 90 days.

Analysis of condition 2:

Accommodation service is supplied for a minimum continuous period of 90 days. Satisfied- as the period of stay of the students in the present case would be a minimum of 12 months.

Analysis of Condition 1:

Value of supply of accommodation is less than or equal to Rs. 20,000/- per month per person.

The exemption entry uses the term value of supply less than or equal to Rs. 20,000“per person per month”. Thereby, it can be said that “per person” need not be the actual recipient (i.e., college in this scenario).

Therefore, the Rs. 20,000 limit could be interpreted as applicable to the individual students availing the accommodation rather than strictly to the service recipient (college). On this basis, BO would be eligible to claim the exemption, as the amount charged per student in this case is Rs. 15,000 which does not exceed the prescribed limit of Rs. 20,000.

However, department may take a contrary view, contending that “per person” in this case is College who is the recipient of service and as the total payments received (i.e., Rs. 15,000 x no of students) from college would exceed Rs. 20,000 per month, and may therefore demand GST along with interest and penalty on the unit accommodation services provided by BO.

Based on the above, it becomes evident that there is ambiguity regarding the interpretation of the term “per person”—should it be viewed as referring to individual students, or does it extend to institutions like colleges that enter into an agreement with the building owner on behalf of the students?

Further, the Fitment committee has proposed to mention ‘Per bed, Per Person, Per Month’ for evaluating the aforesaid exemption, however, the secretary has asked to remove the condition of ‘per bed’, during the 53rd GST Council meeting.

Had “per bed” been included in Entry 12A, it would have allowed the building owner (BO) to easily claim exemption under this entry, where “per person” would apply to the college and “per bed” would refer to individual students. One possible interpretation is that the omission of “per bed” was deliberate to exclude such arrangements from the exemption.

On the other hand, in authors view, it could be argued that the intent behind this exemption is to benefit individual students or residents by eliminating the tax burden. In this case, treating the college as “per person” and excluding this type of arrangement would undermine the very purpose of the exemption.

Conclusion:

Therefore, availing exemption under Entry 12A in such transactions may carry a potential risk of departmental scrutiny and dispute

In light of this ambiguity, it is recommended that stakeholders in this industry make representations to the GST council, seeking clarification on how the exemption under Entry 12A applies to such scenarios or transactions.

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Suggestions or feedback can be sent to the author on tabrez@hnaindia.co.in

The author extends special thanks to CA Thulasiram [thulasiram@hnaindia.com] for vetting this article.