In a recent decision (Advance Ruling No. RAJ/AAR/2023-24/14), the AAR, Rajasthan clarified that landlords are now liable to pay GST on a forward charge basis when leasing residential properties for commercial use.
🏠 Key Facts:
M/s. Deepak Jain, a non-GST registered Chartered Accountant, leased a Jaipur property for commercial use.
Lease agreement with Back Office IT Solution Pvt. Ltd. for commercial purposes.
Premises officially residential but used commercially as per agreement.
❓ Key Issue:
Is the Lessor liable for forward charge GST when leasing a residential property for commercial use?
✅ Decision Highlights:
The Premises, though residential by nature, are considered non-residential due to commercial usage.
Supply of service (commercial renting) is taxable at 18% under SAC 997212.
The lessor obligated to pay GST at this rate on a forward charge basis.
No GST under Reverse Charge Mechanism as per Notification terms.
Premises not classified as a residential dwelling as per the ruling.
Emphasis on considering usage purpose and intended users' stay duration for determining residential nature.
Background: The Evolution of Residential Dwelling Leases in GST
Since the inception of GST, the renting of residential dwellings enjoyed an exemption. However, an amendment on July 18, 2022, removed this exemption when leasing to a registered person. Simultaneously, a new entry was introduced into the list of supplies subject to reverse charge mechanism (RCM). This meant that services related to renting residential dwellings to a registered person would now be taxed under RCM.
Shifting Dynamics: Taxability of Renting Residential Dwellings
Renting immovable property qualifies as a service under the GST Act of 2017. Until July 17, 2022, leasing a residential dwelling for residence purposes remained exempt, while commercial leasing incurred an 18% tax. However, from July 18, 2022, the scenario changed. The 47th GST Council Meeting in June 2022 decided to partially lift the exemption, bringing residential dwellings into the tax net under RCM when provided to a registered person.
Defining 'Residential Dwelling': The Ambiguity and Its Consequences
The term 'residential dwelling' lacks a specific definition in the Central Goods and Services Tax Act, 2017. This ambiguity has led to confusion about the properties falling under this category. Since the reverse charge entry didn't specify the property's use for which RCM is applicable, it became applicable to all residential dwellings leased to registered persons, regardless of their use.
To resolve this uncertainty, an advance ruling was sought by an unregistered person leasing a residential property for commercial use. The ruling clarified that the definition of 'residential dwelling' isn't provided in GST law, relying on dictionary meanings to emphasize the permanence or considerable length of stay as a deciding factor.
Conclusion: The Intersection of Commercial Use and Tax Liability
The ruling affirmed that the property in question, leased for commercial use, falls under the taxable bracket. Despite no change in the property's official designation by the Jaipur Development Authority, the emphasis was on its commercial utilization. Consequently, the supply of service, i.e., renting for commercial use (covered under 997212), is now taxable at 18%, with the lessor obligated to pay GST on a forward charge basis. Notably, the lessee is exempt from the reverse charge mechanism, as outlined in Notification No. 05/2022-Central Tax (Rate) dated July 13, 2022.
Click here to read the full Advance Ruling.