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Tax on Rent for GST - Registered Tenants

Earlier GST was applicable on the rent of commercial properties but now it shall be charged if any residence is rented or leased by a GST-registered person. Read the article to check if this new rule applies to you or your business.

On 18 July 2022, the new goods and services tax (GST) rules came into effect and it led to a new tax of 18% to be paid on residential property rent. The tax is to be paid through the Reverse Charge Mechanism (RCM) – thereby meaning that the tenant will be responsible for it.

Before this, GST was applicable on the rent of commercial properties. However, after the 47th GST Council meeting, GST shall be charged if any residence is rented or leased by a GST-registered person.

What is GST registration?


The GST Rules demand that if a person/company earns more than the minimum set threshold per annum (p.a.), they must be registered under GST. This limit is INR 20 lakh p.a. for individual service providers, such as business consultants, and INR 40 lakh p.a. for any business that makes money by selling products/services. This limit is INR 20 lakh p.a. in designated Northeastern States.
 

Whom will it apply to?


Salaried individuals, who have taken homes on rent or lease, will not be liable to pay this tax. This rule only applies to persons/companies who have completed their GST registration on the aforementioned criteria. For example, this tax will apply to:

  • An individual providing consultancy service.
  • An e-Commerce seller working out of a rented home.
  • Any other individual/company with a GST registration based on the earning threshold.

If the place is used for residential purposes only, this tax may be exempted. For this purpose, one must not claim the rental expense as a ‘business expense’ in the Income Tax Returns (ITR). However, if this is shown as a deduction in the ITR, GST will have to be computed and paid on rent.
 

Exemptions for GST on Rent


GST may be exempted in the following cases:
  • The immovable property is a Residential Property used for ‘residential purposes’ only.
  • Value of goods and services supplied by landlord in the year is less than the threshold of INR 20 lakh p.a. and does not have GST Registration.
  • Rent is received by a registered charitable or religious trust which owns and manages a religious place meant for public use and (i) rent on rooms charged with INR 1,000 or less per day (ii) rent on shops and other spaces for business charged INR 10,000 or less per month (iii) rent on community halls or open area charged INR 10,000 or less per day.
 

What will be the impact of this on businesses?


This development could potentially impact businesses in a number of ways:
  • Businesses will have to factor in additional expenses with the 18% tax over and above the rental charges and restructure their finances.
  • Businesses providing co-living spaces on rent may be impacted.
  • Input Tax Credit (ITC) means claiming credit of the GST paid on purchase of Goods and Services, which are used for the furtherance of business. The availability of claiming ITC can limit the financial impact on businesses seeking such residencies.
  • Corporates leasing apartments for expats coming into India for significant durations may be impacted.
  • People taking residential property on rent in the name of ‘proprietorship concern’ will now reduce to avoid GST liability.
  • Rental real estate business in India may suffer due to this additional tax burden on businesses and entrepreneurs. 
  • Corporates may increase cost-to-company (CTC) of employees in lieu of this additional tax.
 

How to pay GST on rent?


GST is calculated and charged on the total amount of rent that is collected periodically.
  • This is either 9% each of CGST (Central GST) & SGST (State GST) or 18% IGST (Integrated GST) on rent payable.
  • The tenant files the GST return and pays the tax liability.
  • ITC can be availed, if applicable.
  • The onus of proving that GST on rent is not to be paid lies on the tenant.
  • Only required to pay GST on rent if the tenant is registered under GST.
  • To pay GST, go to the official government portal: https://www.gst.gov.in/
 
Learn about e-Invoicing under GST at https://www.indialawoffices.com/legal-articles/what-is-e-invoicing-under-gst
 

Different Scenarios for payment of GST on Rent

  • Scenario 1: Taxpayer located in different state to that of rented property

Place of supply will be the place of property. Hence, interstate supply will apply, i.e., IGST will be charged.

  • Scenario 2: Both landlord and tenant registered in the same state where property is situated

CGST + SGST @ 9% each will be charged.

  • Scenario 3: Landlord registered under GST in the state where property is situated, but tenant registered in another state

CGST + SGST, irrespective of location of GST registration of the tenant. Tenant cannot claim ITC on CGST/SGST if not registered in the same state where the property is.

  • Unregistered Landlord/Owner

 
Tenant liable to pay GST @ 18% under RCM.
 

Conclusion


This tax is sure to impact corporates and their spending structure as, in most cases, they take these residences on lease for their employees. This makes corporates the tenant and, hence, increase tax liability. The new rule also ensures that individuals operating small shops or completing sale orders through third-party online platforms like Amazon, Flipkart, etc. will be held liable for GST on rent.
 
We can assist you with your GST and other tax related queries. You can also visit our other articles on matters related to GST below.

 

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