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GST ON RENTING OF IMMOVABLE PROPERTY


GST ON RENTING ON IMMOVABLE PROPERT

In accordance with the Goods and Services Tax (GST) system, various goods and services, including rental properties, are subject to taxation. Whether you are a landlord earning rental income or a tenant paying rent, GST is applicable. However, it is important to understand that the application of GST on rent depends on the type and ultimate use of the property. In July 2022, an amendment was introduced, bringing significant changes to the taxability of renting immovable property. This article explores the implications of the amendment on property rentals and provides insights into the complexities of the taxation system in this regard.


Renting immovable property is considered a taxable service under the Central Goods and Services Tax (CGST) Act of 2017. Section 7 of the CGST Act defines supply to include rental, lease, and other transactions made for consideration in the course or furtherance of business. Schedule II of the act clarifies whether a transaction should be treated as a supply of goods or services. According to Para 2, leases, tenancies, and licenses to occupy land are classified as supplies of services. Additionally, Para 5 specifically states that renting immovable property is considered a supply of service, making it subject to GST.


Under the GST regime, renting immovable property is divided into two categories: residential property and commercial property. Residential property includes houses, apartments, and flats used for residential purposes, whereas commercial property encompasses shops, offices, factories, and warehouses used for commercial purposes.


Since the introduction of GST, renting commercial properties has been taxable. The supplier is required to issue a tax invoice and collect GST under the forward charge mechanism, regardless of the recipient's nature or the property's use. The main consideration is whether the supplier needs to register under GST. According to Section 22 of the CGST Act 2017, a supplier must register in the state where they make taxable supplies of goods or services if their aggregate turnover exceeds 20 lakhs in a financial year.


Regarding the renting of residential dwellings for residential purposes, an exemption was previously granted under GST through notification no. 12/2017. To qualify for the exemption, two conditions needed to be met: the property should be a residential dwelling and used for residential purposes. If a residential dwelling was used for non-residential purposes, it was taxable under the forward charge mechanism.


However, this exemption has been modified through notification no. 4/2022, adding a third condition.


“against serial number 12, in column (3), after the words “as residence”, the words “except where the residential dwelling is rented to a registered person” shall be inserted;”


As of July 18, 2022, the exemption is only available when a residential dwelling used for residential purposes is rented to an unregistered person, excluding cases where the residential dwelling is rented to a registered person.


Furthermore, notification no. 5/2022 introduced a new entry to the list of supplies taxable under reverse charge.


after serial number 5A and the entries relating thereto, the following serial number and entries shall be inserted, namely: -

(1)

(2)

(3)

(4)

5AA

Service by way of renting of residential dwelling to a registered person

Any person

Any registered person.”


Starting from July 18, 2022, GST-registered tenants are obligated to pay 18% GST for renting residential units for any purpose, regardless of the landlord's GST registration. This amendment, announced after the 42nd meeting of the GST Council on July 13, 2022, has significant implications for the rental market, requiring landlords and tenants to be aware of the updated policy.


To summarize the pre- and post-amendment scenarios: before the amendment, renting residential property for residential purposes was exempt from GST, and neither the landlord nor tenant paid GST on the rent. However, if the property was used for commercial purposes, it was taxable under the forward charge mechanism.

After the amendment, the exemption for renting residential properties changed, and GST is applicable when renting to a registered person. In such cases, GST-registered tenants are liable to pay 18% GST, regardless of the landlord's GST registration. For example, if a residential property is rented to a GST-registered company for use as a guest house, the company must pay 18% GST on the rental amount.


Analyzing the pre- and post-amendment scenarios provides the following insights:


  • In the pre-amendment scenario, if an unregistered supplier rented a residential property to a registered recipient for residential use, it was exempt from tax. However, in the post-amendment scenario, the registered recipient must pay 18% GST on the rent, and the transaction falls under the Reverse Charge Mechanism (RCM).

  • In the pre-amendment scenario, a registered supplier renting a residential property to another registered recipient for residential use was exempt from tax. With the latest amendment, if the recipient is registered, the transaction now falls under the RCM.

  • In the pre-amendment scenario, if a registered supplier rented a residential property to another registered recipient for commercial use, the transaction was always subject to the Forward Charge Mechanism (FCM). However, in the post-amendment scenario, it would be subject to the RCM.

These changes have significant implications for the rental market, and it is crucial for both landlords and tenants to understand and comply with the updated policies.


Moving on, the following table appears to be a list of different types of transactions between suppliers and recipients, along with information about how those transactions should be treated for tax purposes.


Supplier

Recipient

Nature

Use

Pre

Post

Unregistered

Registered

Residential

Residence

Exempt

RCM

Registered

Registered

Residential

Residence

Exempt

RCM

Unregistered

Registered

Residential

Commercial

FCM

RCM

Registered

Registered

Residential

Commercial

FCM

RCM

Registered

Registered or Unregistered

Commercial

Residence

FCM

FCM

Registered

Registered

Commercial

Commercial

FCM

FCM

Unregistered

Registered

Commercial

Commercial

NO TAX*

NO TAX*

Unregistered

Unregistered

Commercial

Any use

NO TAX*

NO TAX*

Unregistered

Unregistered

Residential

Commercial

NO TAX*

NO TAX*

Unregistered

Unregistered

Residential

Residence

Exempt

Exempt

*The taxability of these transactions is dependent on the supplier's registration status. Since the supplier is unregistered, they are not liable for tax at the moment. However, if the supplier crosses the threshold of Rs 20 lakhs and becomes registered, these transactions will become taxable.


To summarize, the renting of immovable property is classified as a service and falls under the purview of GST. The applicability of GST depends on whether the property is residential or commercial. It is essential for both businesses and individuals to have a clear understanding of the GST implications when renting or leasing immovable property in order to comply with the relevant regulations.


Efforts By -

Rushil Gupta

Abhay Sehgal


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