Background:

1. Renting of immovable property was first brought under the service tax net 15 years ago, under the positive list regime in the year 2007. While it was shrouded with some ambiguity, the same was made abundantly clear through retrospective amendments made in law subsequently. Thereafter, with the advent of the negative list regime under the service tax laws from July 2012, a specific entry in the declared service list was incorporated to expressly state that such services are within the ambit of service tax laws, lest a contention may have been raised by taxpayers that mere renting is not a "service".

2. Under the GST regime, the provisions continued Para Materia, by way of inclusion of the words "license, rental, lease" within the definition of "supply" itself.

3. Throughout the above period, the intention of the government seemed to be tacitly clear – to levy tax on commercial rentals and short-term accommodation (subject to threshold limits) while at the same exempt residential rentals.

4. The two-fold tests to determine the eligibility of exemption in the case of residential rentals under the GST regime were – firstly, the nature of property test, i.e. property should be a "residential dwelling"; and secondly, the end-use test, i.e. property should be used as a residence. Other factors such as the registration status of the lessor or lessee were not material.

5. In case of accommodation services by commercial spaces (hotels, inns, guest houses, etc. ) are not covered under the exemption above, separate exemption entry was available where the declared tariff was below Rs. 1,000 per day. If such spaces are rented through eCommerce operators, such operator is required to pay tax under section 9(5) of the CGST/SGST Act in cases where the supplier is unregistered. Where the supplier is registered, tax shall be paid on a forwarding charge basis, but may attract TCS provisions under section 52 of the CGST/SGST Act.

Emerging business models:

6. Whilst the above tax positions were simple enough on paper, practically various business structures emerged which necessitated specific address by the Government. Take for instance a structure where residential properties are rented and used as residences but managed by third parties as part of their commercial operations. For example, a residential property with many units is taken on rent by a commercial operator and run as managed paying-guest accommodations or hostels. Further vagaries in these structures may exist whereby the property may be rented by the commercial operator who in turn sublets to the tenants (sublet model) or the property is directly rented by the landowner to the tenants with the commercial operators taking their share by way of service fees charged to the tenant and/or landowner (agency model) or existence of multiple such operators or managing the properties for institutional customers such as educational institutions (as hostels for students), factories (as PG for workers), etc. . Added to this, the commercial operator may be running the rentals through e-Commerce which would overlap the eCommerce-operator specific GST provisions.

7. In the above backdrop, various rulings of Authority for Advance Rulings were being pronounced across the country wherein some of these structures were evaluated. One such ruling eventually culminated in a Karnataka High Court judgement in the case of Taghar Vasudeva Ambrish v. Appellate Authority for Advance Ruling [2022]  wherein the Honourable High Court held that the exemption notification does not require the lessee itself to use the premises as a residence, and hence, as long as the dual conditions of a residential dwelling and end-use for residential purposes are fulfilled, the service remains exempt.

Amendments in July 2022:

8. Perhaps considering the emerging models as taking advantage of a loophole in the GST law and to mop-up tax collections, the Government has made a series of amendments in this regard which are effective from 18 July 2022, which can be summarized below :

8.1. A new condition has been added to the exemption notification for residential rentals, whereby apart from the nature of dwelling and end-use conditions which existed earlier, exemption from GST is not available "where the residential dwelling is rented to a registered person". Such residential rental services not covered under the exemption notification are now taxed at 18%.

8.2. The exemption limit of Rs. 1,000 per day is removed in the case of hotels, inns, campsites, etc. and such services are now taxed at 12% (where the declared tariff per day is more than Rs. 7,500 per day, the applicable tax rate remains unchanged at 18%).

8.3. "Service by way of renting of a residential dwelling to a registered person" is now covered under the reverse charge mechanism where the lessee will be the person responsible for remit tax, irrespective of end-use.

Flowchart to determine taxability:

9. With these set of amendments being made, we shall now attempt to simplify the tax implications using the below flowchart :

Note: this is just an attempt to simplify the understanding of GST implications on property rentals in general. Specific implications have to be evaluated appropriately in accordance with applicable law.

Areas of concern:

10. Taxpayers may look out for the following implications and ambiguities :

10.1. RCM applies even when the residential dwelling is used for commercial purposes by the lessee who is a registered person. In other words, if a "residential dwelling" is taken on rent as a commercial office by any registered taxpayer, GST is now payable under RCM even if the landlord is registered (RCM is not optional).

10.2. Where managed residential properties (such as hostels) are directly rented to end customers, the agreement between the landlord and the operator needs to be checked for implied "renting" between the landowner and managed service operator, based on the substance and conduct of the parties.

10.3. Corporates taking residences on rent for providing rent-free accommodation to employees or as hostels, etc. may be required to remit GST under RCM.

10.4. "Residential dwelling" is not defined under GST laws – guidance will have to be taken from records as per Municipal and other authorities, categorization for the purposes of electricity/water/utilities, property tax rates, etc.

10.5. Input tax credit will not be available in cases where output tax is paid under RCM basis by the recipient or where output tax is exempt.

10.6. In a scenario where the residential dwelling is taken on rent by registered persons who in turn rent it to another registered person, GST shall be payable under RCM on both legs of the rentals. Thereby the GST paid under RCM by the first lessee shall not be creditable and will become a cost. The seamless credit chain would be broken.

10.7. Lessors and lessees should have concurrence on the nature of property and end-use. It is suggested to include the same expressly in the rental agreements to avoid future disputes relating to facts.

10.8. Other specific implications on rentals affecting charitable trusts, long-term rentals, rentals from the government, etc. are not covered in this article and will have to be considered separately.

10.9. Rental of residential dwellings taken by educational institutions, hospitals, etc. for use as a residence (as hostels/PGs, etc.) may become taxable if such educational institution/hospital is required to obtain GST registration for any purpose.

10.10. Place of supply in case of rentals would be where the property is located. Hence, for payment of tax under RCM, the registered person would be required to remit tax from the state where the property is located.

Concluding Remarks

11. From the above, it can be seen that the taxability, person liable to pay tax, rate of tax, input tax credits, and other implications vary based on several permutations involved. The implications also vary based on certain keywords and phrases such as "residential dwelling" and "use as a residence" which are not expressly defined under the law. The government is humbly requested to take cognizance of the same and duly clarify the scope and ambit of the vagueness in order to avoid needless litigations. As the saying goes, "Mystification is simple; clarity is the hardest thing of all".

- C.A. Krishna Bansal