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GST on Rent Compensation – Residential Property

Notification No 05/2022 dated July 13, 2022, applicable from July 18, 2022

I have been curiously and incisively watching and analysing, threadbare, the insightful discussions pertaining to the applicability of GST on Rental Compensation payable by a Registered Person who is a Service Recipient from an Unregistered Person. A registered person is essentially paying such rent or house rent or house compensation or any other nomenclature used in the ordinary parlance, as most of us laymen would comprehend. I have deliberated by considering the interplay of GST Law, Income Tax Act 1961 & Wealth Tax Act, 1957.

Goods and Service Tax Act, 2017

In this article, I am putting forward my considered view about the applicability of levy on the rent payable by a Registered person arising out of Notification No 05/2022 dated July 13, 2022, which has been made applicable from July 18, 2022, whereby following entry has been inserted namely Entry No 5AA which is tabulated below:

 

(1) (2) (3) (4)
“5AA Service by way of renting a residential dwelling to
a registered person.
Any person Any registered person.”;

 

The above notification has been issued under Section 9(3) of CGST Act, 2017 & corresponding to Section 5(3) of IGST Act, 2017. But in general, usually, most discussions revolve around sections as specified under section 9(3) of CGST
Act,2017. Before we discuss further, let us understand the various terms used in this article or as defined under the law. Section 2(84) of CGST Act, 2017 defines.

“person” includes —

(a) an individual;

(b) a Hindu Undivided Family;

(c) a company;

(d) a firm;

(e) a Limited Liability Partnership;

(f) an association of persons or a body of individuals, whether incorporated or not, in India or outside India;

(g) any corporation established by or under any Central Act, State Act or Provincial Act or a Government company as defined in clause (45) of section 2 of the Companies Act, 2013 (18 of 2013);

(h) any body corporate incorporated by or under the laws of a country outside India;

(i) a co-operative society registered under any law relating to co-operative societies;

(j) a local authority;

(k) Central Government or a State Government;

(l) society as defined under the Societies Registration Act, 1860 (21 of 1860);

(m) trust; and

(n) every artificial juridical person, not falling within any of the above;

“Registered person” means a person who is registered under section 25 but does not include a person having a Unique Identity Number.

Thus, any person who is not registered as per section 25 would be termed an “Unregistered person”.

Section 25 of the CGST Act, 2017 provides procedures for registration which can be referred by readers under the CGST Act, 2017 if desired. As I understand term “Residential Dwelling “is not defined under GST Acts, 2017 but such term is referred to in the following notifications which are tabulated below;

 

(1) (2) (3) (4) (5)
Notification 9/2017-
IGST Tax (Rate) dated
28.06.2017 Entry No 13
&
Notification 12/2017- –
Central Tax (Rate) dated
28.06.2017 Entry No 12
Heading
9963 or
Heading
9972
Services by way of
renting of residential
a dwelling for use as
residence.
Rate
– NIL
Condition
– NIL

 

The above entries are also amended vide Notification No 04/2022 dated July 13, 2022, which are tabulated below:

 

(1) (2) (3) (4) (5)
Notification
04/2022- Central
Tax (Rate) dated
13.07.2022 Entry
No 12
Heading
9963 or
Heading
9972
Services by way of renting of
a residential dwelling for use
as residence except where
the residential dwelling is
rented to the registered person.
Rate
– NIL
Condition
– NIL

Commentaries on SAC Classifications specify as under

9963 Accommodation, food, and beverage services

99631 Accommodation services

This group includes accommodation services provided for the purposes of leisure or business or others.

996311 Room or unit accommodation services

This service code includes accommodation services consisting of rooms or units, with or without kitchens & with or without daily housekeeping services, provided by Hotels, INN, Guest houses, Clubs & other similar establishments on a single or multi-occupancy basis, for purposes of leisure or business or others.

This service code does not include:

– accommodation services at recreational and vacation camps, cf. 996313

– accommodation services for students in student residences, cf. 996321

– accommodation services in workers hostels or camps, cf. 996322

9972 Real estate services

99721 Real estate services involving owned or leased property

997211 Rental or leasing services involving own or leased residential property

This service code includes rental or leasing services concerning residential properties by owners or lease holders’
houses, flats, apartment buildings, and multiple-use buildings that are primarily residential, and residential mobile home sites.
This service code does not include: –

accommodation services provided by operating hotels, motels, rooming houses, school dormitories, campsites, and other lodging places, cf. 99631

Income Tax Act, 1961 – Source based Theory & TDS applicability

Income from house property under Income Tax Act,1961

Extracts from the Income Tax Statute…

Section 22

The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income tax, shall be chargeable to income tax under the head “Income from house property”.

Rent. – Rent paid under the head Profits and Gains of Business or Profession – TDS applicable to specified persons only when such rent exceeds Rs.240000/- per annum
Section 194-I.  Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of—

(a) two percent for the use of any machinery or plant or equipment; and
(b) ten percent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings:

Provided that no deduction shall be made under this section where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed two hundred and forty thousand rupees:

Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts, or turnover from the business or profession carried on by him exceed [one crore rupees in case of business or fifty lakh rupees in
case of profession] during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid, shall be liable to deduct income tax under this section:

Provided also that no deduction shall be made under this section where the income by way of rent is credited or paid to a business trust, being a real estate investment trust, in respect of any real estate asset, referred to in clause (23FCA) of section 10, owned directly by such business trust.

Explanation. —For the purposes of this section, —

(i) “rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy, or any other agreement or arrangement for the use of (either separately or together) any, —

(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings,

whether or not any or all of the above are owned by the payee;

(ii) where any income is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

Payment of rent by certain individuals or Hindu undivided families. – House Rent payable in excess of Rs.50000 per month

194-IB. (1) Any person, being an individual or a Hindu undivided family (other than those referred to in the second proviso to section 194-I), responsible for paying to a resident any income by way of rent exceeding fifty thousand rupees for a month or part of a month during the previous year shall deduct an amount equal to five percent of such income as income-tax thereon.

(2) The income tax referred to in sub-section (1) shall be deducted on such income at the time of credit of rent, for the last month of the previous year or the last month of tenancy, if the property is vacated during the year, as the case may be, to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.

(3) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.

(4) In a case where the tax is required to be deducted as per the provisions of section 206AA such deduction shall not exceed the amount of rent payable for the last month of the previous year or the last month of the tenancy, as
the case may be.

Explanation. —For the purposes of this section, “rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy, or any other agreement or arrangement for the use of any land or building or both.

Wealth Tax Act, 1957 – Extracts

Section 2 definitions

“assets”, in relation to the assessment year commencing on the 1st day of April 1993, or any subsequent assessment year, means—

any building or land appurtenant thereto (hereinafter referred to as “house”), whether used for residential or commercial purposes or for the purpose of maintaining a guest house or otherwise including a farmhouse situated within twenty-five kilometers from the local limits of any municipality (whether known as Municipality, Municipal Corporation, or by any other name) or a Cantonment Board, but does not include—

(1) a house meant exclusively for residential purposes and which is allotted by a company to an employee or an officer or a director who is in whole-time employment, having a gross annual salary of less than [ten] lakh rupees.

(2) any house for residential or commercial purposes which forms part of stock-in-trade;

(3) any house which the assessee may occupy for the purposes of any business or profession carried on by him;

(4) any residential property that has been let out for a minimum period of three hundred days in the previous year;

(5) any property in the nature of commercial establishments or complexes;].

Considering the above background, the following points of practical reality can emerge:

  • Property is let out/given by the landlord to the Tenant who may be Registered or Unregistered under the provisions of GST Act, 2017 only for Residential Purposes;
  • A tenant who is occupying such property is using it only for the purpose of Residence, and is not claiming such rent as a business expenditure u/s 30 of the Income Tax Act 1961 & as contemplated and envisaged under the provisions of Section 28 of the Income Tax Act, 1961.
  • The landlord ostensibly must be showing such rental income as Income from House Property under section 22 of the Income Tax Act, 1961 and paying the appropriate taxes as applicable as per the provisions of the Income Tax Act 1961.
  • A tenant who is registered under the provisions of the GST Act, 2017 may or may not be registered for the same premises which are registered under the provisions of the GST Act, 2017.
  • Such Rent can be paid from personal funds or it can be paid from business earnings, it won’t make any difference as long as such rent is not claimed as business expenditure by the Tenant u/s 30 of the Income Tax Act 1961.
  • The tenant must be rightfully deducting TDS u/s 194IA of the Income Tax Act, 1961 @ 5% of Rent paid if applicable by depositing TDS as applicable by filing Form 26QC and issuing Form 16IC to the landlord for such TDS deducted.
  • The tenant may be deducting TDS u/s 194I of the Income Tax Act, 1961 @ 10% of the rent paid by depositing TDS as
    applicable by filing Form 26Q and issuing Form 16A to the landlord for such TDS deducted, in that case, the RCM levy would be triggered as per Notification No 05/2022 dated July 13, 2022.

Now let us examine the levy payable on house rent payable on or after July 18, 2022, in the following illustrative scenarios:

Often used abbreviations are stated below:

Unregistered Person – URP (Employees, Flat/Property Owners Businessman, Students, Professionals, etc.)

Registered Person – RP (Flat/Property Owners, Businessman, Students, Professionals, etc.)

R – Residential Purpose only

NR- Non-Residential or Commercial or Partly Residential & partly commercial

RCM – Reverse Charge mechanism as per the provisions of GST Act, 2017

FCM – Forward Charge mechanism as per the provisions of GST Act, 2017.

For the sake of brevity, I am essentially covering only following SAC codes & no other codes viz.

9972 Real estate services

99721 Real estate services involving owned or leased property 997211 Rental or leasing services involving own or leased
residential property

This service code includes rental or leasing services concerning residential properties by owners or lease holders’
houses, flats, apartment buildings, and multiple-use buildings that are primarily residential, and residential mobile home sites.

These service codes do not include:

– accommodation services provided by operating hotels, motels, rooming houses, school dormitories, campsites, and other lodging places, cf. 99631

Property is given on rent for Residential Purposes only

 

Situation Comments/View –
GST and Income Tax Implications
URP gives his residential property on
monthly rent for residential purposes to URP
as per the provisions of the GST Act, 2017
viz. Businessman, Salaried Employee Owner
etc.
No GST is applicable or payable as both the
parties are unregistered under the
provisions of GST Act, 2017
Property Given on Rent where rent
payable is less than Rs.50,000/- per
month

URP/RP gives his residential property/ties
on monthly rent for residential purposes to RP
as per the provisions of the GST Act, 2017
who is paying rent less than Rs.50000 per
month.
No GST would be payable even under this
scenario as he is not claiming such rent
paid as business expenditure u/s 30 of the
Income Tax Act, 1961 & as contemplated &
envisaged as per Section 28 of the Income
Tax Act, 1961.
The landlord has to show such rental income
as Income from House Property u/s 22 of
the Income Tax Act 1961.
Property Given on Rent where rent
payable is more than Rs.50,000/- per
month

URP /RP gives his residential property/ties
on monthly rent for residential purposes to RP
as per the provisions of the GST Act, 2017
who is paying rent of more than Rs.50000
per month
No GST would be payable even under this
scenario because such a Registered Person is
not claiming such rent as a business
expenditure u/s 30 of the Income Tax
Act 1961 & as contemplated & envisaged
as per Section 28 of the Income Tax Act,
1961 & even he could be depositing TDS
u/s 194IA of the Income Tax Act, 1961 @
5%, filing Form 26QC and issuing Form
16C as specified under Income Tax Rules.
A landlord has to show such rental income
as Income from House Property u/s 22 of
the Income Tax Act 1961.
Property Given for House Rent
Accommodation

URP/ RP gives his residential property/ties
on monthly rent for residential purposes to RP
who in turn is providing the property to his
employees for residential use as per terms of
employment-whether mandatory or non-mandatory under any other provisions as
applicable to such registered persons.
(House Rent Accommodation as perquisites
provided by the Employer)
GST would be payable by the Recipient
viz. Tenant as such rent would be termed
as business expenditure u/s 30 of the
Income Tax Act 1961 & as contemplated
& envisaged as per Section 28 of the Income
Tax Act, 1961, TDS would be deducted u/s
194I of the Income Tax Act, 1961 @ 10% by
depositing in Form 26Q and issuing Form
16A as specified under Income Tax Rules.
In cases of Employees to whom such
property is provided for their residential
purposes, the Employer may be recovering
such dues or Employer may be treating the
same as perquisite u/s 17 of the Income
Tax Act, 1961 and deducting appropriate
TDS u/s 192B of the Income Tax Act 1961
as per the provisions of Chapter XVII-B of
the Income Tax Act 1961 and if not treated
as a prerequisite, then such benefit or
perquisite may be taxed u/s 194R of the
Income Tax Act, 1961 as per terms and
conditions specified therein.
Non-compliance with TDS provisions under
the Income Tax Act, of 1961 may trigger
disallowances u/s 40(a)(ii) of the Income
Tax Act, 1961 & Taxpayer may be termed
as assessee in default u/s 201 of the
Income Tax Act, 1961.
URP/RP gives his residential property/ties
on monthly rent as a guest house to RP who in turn may be using the same for the
benefits of his staffs/visitors/client/vendors
etc. for their temporary residential
requirements, considering the necessity as
well as by reason of furtherance of business.
GST would be payable by the Recipient
under RCM on guest house rent paid
because such rent would be termed as
business expenditure u/s 30 of the Income Tax Act 1961 & as contemplated
& envisaged as per Section 28 of the Income
Tax Act, 1961, TDS would be deducted u/s
194I of the Income Tax Act, 1961 @ 10% by
depositing in Form 26Q and issuing Form
16A as specified under Income Tax Rules.
Such benefit or prerequisite may be taxed u/s
194R of the Income Tax Act, 1961 as per
terms and conditions specified.
GST paid under RCM may be claimed as
ITC is subject to terms and conditions of
Section 16 & Section 17 by the Registered
person.
Non-compliance with TDS provisions under
the Income Tax Act, of 1961 may trigger
disallowances u/s 40(a)(a) of the Income
Tax Act, 1961 & Taxpayer may be termed
as assessee in default u/s 201 of the
Income Tax Act, 1961.
The landlord has to show such rental income
as Income from House Property u/s 22 of
the Income Tax Act 1961.
Some specific situations

Director of the Company giving his flat on
rent to the company (listed/closely
held/unlisted/LLP).


Partner of the Flat giving his flat on rent
to the Firm/LLP & company
(listed/closely held/unlisted etc.).

Director/Partner needs to charge GST
under FCM by registering himself under the
provisions of the GST Act, 2017 if not
registered and comply with all provisions as
applicable as specified under the GST Acts,
2017.
If Company/Firm is registered, then, it may
claim the benefit of ITC as per the terms
and conditions specified u/s 16 & 17 of
CGST Act, 2017.
Provisions of perquisite valuation u/s 17 for
TDS deduction u/s 192B of the Income Tax
Act, 1961 or benefit or perquisite u/s 194R
of the Income Tax Act 1961 under u/s 28 of
the Income Tax Act, of 1961 needs to be
complied.
Non-compliance with TDS provisions under
the Income Tax Act, of 1961 may trigger
disallowances u/s 40(a)(ia) of the Income
Tax Act, 1961 & Taxpayer may be termed
as assessee in default u/s 201 of the
Income Tax Act, 1961.Director/Partner will offer such income to
tax under the head Income from House
Property u/s 22 of the Income Tax Act,
1961.

House rent paid in advance prior to July
18,2022 or House rent paid upfront prior
to July 18,2022
If such is the case then GST won’t be payable
under RCM as the Time of supply is triggered
before the applicability of the provisions
w.e.f July 18,2022.

House rent paid to Non-Resident Landlord
Views, as discussed, may be suitably applied
considering the facts of each scenario.
House rent paid to Landlord located in a
place other than the place where property
is located Say Property located in Mumbai
and Landlord located in Delhi
There are divergent views but in my opinion
, the transaction would be termed as inter-state
supply transaction & if GST is applicable,
then IGST would be leviable under FCM
@18 % or payable under RCM @ 18% as the
the case may be but provisions as applicable
for Hotel accommodation for levy as intrastate supply viz. CGST @9% + SGST @9%
can’t be made applicable to the transaction
of rent payable for the housing property
especially considering POS u/s 2(86), POS
provisions u/s 12, Location of Recipient of
Services u/s 2(14) & usual place of
residence u/s 2(113) of the CGST Act 2017.
House rent paid to Landlord located in the
same place where property is located say
Property located in Mumbai and Landlord
is also located in Mumbai.
The transaction would be termed an intra state
supply & depending on the facts of the
transactions GST would be leviable under
FCM @18 % or payable under RCM @ 18%
as the case may be viz. CGST @9% + SGST
@9%

 

Property has given for Non-Residential Purposes or Commercial Purposes or Partly Residential & Partly Commercial Purposes

 

Property given for Non-Residential Purposes or Commercial Purposes orPartly Residential & Partly Commercial Purposes

Situation Comments/View –
GST and Income Tax Implications
URP gives his residential property on a
monthly rent for a non-residential purpose
or commercial purpose or partly residential
and partly commercial purposes to URP as
per the provisions of the GST Act, 2017 viz.
Businessman, Salaried Employee Owner
etc.
uch URP would be liable to register under
the provisions of GST Act, 2017 as
applicable and after registration such
person needs to comply with all the
provisions of the GST Act, 2017.
Post registration such person needs to
charge GST @ 18% as applicable to the
Recipient.
If GST is charged by Landlord, then it would
be additional cost for the tenant if such
terms and conditions are provided in the
leave and license agreement. If not provided,
then it would be cost in the hands of
landlord.
TDS (if applicable) would be deducted u/s
194I of the Income Tax Act, 1961 @ 10% by
depositing in Form 26Q and issuing Form
16A as specified under Income Tax Rules.
Non-compliance of TDS provisions under
the Income Tax Act, 1961 may trigger
disallowances u/s 40(a)(ia) of the Income
Tax Act, 1961 & Taxpayer may be termed as
assessee in default u/s 201 of the Income
Tax Act, 1961.
Landlord has to show such rental income as
Income from House Property u/s 22 of the
Income Tax Act 1961.
RP gives his residential property on monthly
rent for a non-residential purpose or
commercial purpose or partly residential
and partly commercial purposes to RP as per
the provisions of the GST Act, 2017 viz.
Businessman, Salaried Employee Owner
etc.
Such RP would be liable to charge GST @
18% under FCM.
If GST is charged by Landlord, then
depending on the conditions and
stipulations as per the provisions of Section
16 & Section 17, Registered person may
claim ITC as per the provisions of GST Act,
2017.
RP may need to consider the provisions of
Rule 42/43 of CGST Act, 2017 for reversing
ineligible credits as per the provisions of the
Act.
TDS (if applicable) would be deducted u/s
194I of the Income Tax Act, 1961 @ 10% by
depositing in Form 26Q and issuing Form
16A as specified under Income Tax Rules.
Non-compliance of TDS provisions under
the Income Tax Act, 1961 may trigger
disallowances u/s 40(a)(ia) of the Income
Tax Act, 1961 & Taxpayer may be termed as
assessee in default u/s 201 of the Income
Tax Act, 1961.
Landlord has to show such rental income as
Income from House Property u/s 22 of the
Income Tax Act 1961.
Property given on rent to Composition
Dealer
RP gives his residential property on monthly
rent for a non-residential purpose or
commercial purpose or partly residential
and partly commercial purposes to RP who
is registered as composition dealer u/s 10 of
the CGST Act, 2017 viz. Businessman,
Salaried Employee Owner etc.
Such RP would be liable to charge GST @
18% under FCM.
Composition Dealer as recipient won’t be
eligible to claim the benefit of ITC u/s 16 &
17 of CGST Act, 2017 as they are not
entitled to claim such benefits.
TDS (if applicable) would be deducted u/s
194I of the Income Tax Act, 1961 @ 10% by
depositing in Form 26Q and issuing Form
16A as specified under Income Tax Rules.
Non-compliance with TDS provisions under
the Income Tax Act, of 1961 may trigger
disallowances u/s 40(a)(a) of the Income
Tax Act, 1961 & Taxpayer may be termed as assessee in default u/s 201 of the Income
Tax Act, 1961.
A landlord has to show such rental income as
Income from House Property u/s 22 of the
Income Tax Act 1961.

 

I have at this early stage since the latest statutory announcements tried to delve into provisions and interpret them purposively and practically, keeping in mind the interplay between GST and the Income Tax Acts. The passage of time will further unravel aspects and complexities which can impact the propositions advanced by me in this article. But still, I
felt that I need to advance my first comments and project their possible impact on various practical scenarios that we Taxpayers and Professionals have to deal with. I hope my views will provoke the readers to think deeper and project more on the matter. And yes, I am reminded of the idiom “A Heavy Purse Makes A Light Heart” or is it turning out to
be “A light Purse makes a Heavy Heart” with the fresh levies envisaged in the above notification…

(Note: Views expressed are my personal views and they may not be accepted by the Government. All readers are requested to take their considered views based on their own study and research to reach any suitable conclusions. There can be many other situations under the law/s but I have tried to establish the seed of thought by way of this article in the minds of readers. Suggestions to improve the article are always welcome with folded hands).

Profile photo of Nitin Bhuta Nitin Bhuta

Presently, he is actively involved with limited scale of doing Audits, Direct & Indirect Taxation, Management Advisory as well as handling of litigation matters, etc. of Corporate as Well as Non-Corporate persons. Presently, he is actively involved vetting out of drafted legal documents pertaining to business arrangements from the tax compliance perspective.

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