GST ON RENTAL INCOME
By CA Alok Krishan
GST on Renting of immovable property has been an issue of discussion for a long time. From basic questions like is GST payable on rental income and what is the rate of GST on rental income in India, to questions like which component of GST is applicable on rent. An attempt has been made to discuss all issues pertaining to GST on rental income in this write up.
Is GST payable on rental income:
Section 7(1) of the Central Goods and Services Act 2017 (CGST Act) in clause (a) states that “all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business” is supply. Section 2(83) also while defining outward supply states that “outward supply in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business”.
Thus the basic definition of supply and outward supply includes rental income in the ambit of supply. Schedule II in clause 5(a) treats renting of immovable property as supply of service. However Entry no. 13 of exemption Notification no. 9/2017 (IGST) dated 28.06.2017 exempts the services by way of renting of residential dwelling for use as a residence from GST meaning thereby that if the residential dwelling when leased out for residential purposes is not taxed under GST but when it is leased for commercial purposes then no exemption will apply and the rental from such residential property shall be taxable under GST.
To conclude, under GST renting or leasing of:
- Commercial property is a taxable supply;
- Residential property for commercial purpose is a taxable supply;
- Residential property for residential purpose is a exempted supply.
What is GST rate on rental Income:
To arrive at the applicable GST rate on rental income, let us first determine the SAC of rent.
Under heading 9972, SAC 997211 refers to rental or leasing services involving owned or leased residential property. SAC 997212 refers to rental or leasing services involving owned or leased non-residential property. Referring to Notification No. 8/2017(IGST) at entry No. 16 rates for renting for commercial purpose services are taxed at 18%
Renting is Interstate or Intrastate supply?
In the earlier indirect tax regime, rent was subject to tax under Service tax which being a central tax the concept of inter-state or intra-state was not relevant. But in GST regime we need to understand the meaning of inter-state supply and intra-state supply and then bifurcate the supply of service into these components, GST being destination based tax.
For the purpose of determining this we need to refer to Inter State Goods and Service Tax Act 2017 (IGST Act) and look into two aspects of the transaction that is Place of Supply of Services (Contained in section 12 of IGST Act) and Location of Supplier (Contained in section 2(15) of IGST Act). If these two determining factors fall in two different States then it is a case of interstate supply and if both these fall in the same state then it is an intra-state supply.
Let us now use this determining factor for deciding the taxability of rental income.
Place of supply in case of immovable property is where the property is situated as section 12(3) of IGST Act states that “place of supply of service in relation to an immovable property shall be the location at which the immovable property is located.”
Referring to section 2(15) of IGST Act to determine place of supplier, we find 4 clauses as under:
“location of the supplier of services” means,––
(a) where a supply is made from a place of business for which the registration has been obtained, the location of such place of business;
(b) where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;
(c) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and
(d) in absence of such places, the location of the usual place of residence of the supplier;
The crux in this as is apparent are two components namely place of business which is defined section 2(85) of CGST Act and fixed establishment which is defined in section 2(50) of CGST Act. Both of these are reproduced below:
“place of business” includes––
(a) a place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods, supplies or receives goods or services or both; or
(b) a place where a taxable person maintains his books of account; or
(c) a place where a taxable person is engaged in business through an agent, by whatever name called;”
“fixed establishment” means a place (other than the registered place of business) which is characterised by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services, or to receive and use services for its own needs;
Thus by just having an immovable property, test of place of business as per section 2(85)(a) of CGST Act is not fulfilled. Further section 2(85)(b) requirement of having a fixed establishment are also not met as section 2(50) parameters of fixed establishment are also not fulfilled by owing a building only. Section 2(85)(c) is not applicable qua above and the last option ie section 2(85)(d) ie. the location of the usual place of residence of the supplier becomes the place of supplier.
In light of the above discussion, we conclude that the place of supply in case of renting of immovable property will be situation of the property and the place of supplier would be place of usual residence of the supplier. If property is situated in the state where the supplier resides, it will become an intra-state supply and CGST and SGST will be charged and if the property is situated in the state where the owner usually resides, the supply will become inter-state supply and IGST will be charged.
Explaining this with illustrations:
Mr. A, resident of Panchkula (Haryana) owns two properties, one in Chandigarh and another in Panchkula. Both these are given on rent for commercial purpose. In this case Mr. A should het himself registered in the state of Haryana. He will have to get registered because the rent charged for property in Chandigarh will be inter-state supply and no basic exemption will be available. He will charge SGST and CGST on rent for property in Haryana and IGST for property in Chandigarh
Mr. A, resident of Panchkula (Haryana) owns two properties, one in Chandigarh and another in Delhi and given them on rent for commercial purpose. Even in this case Mr. A should het himself registered in the state of Haryana. He will charge IGST for both the properties in Chandigarh and Delhi.
Mr. A, resident of Himachal Pradesh owns in Himachal Pradesh and given it on rent for commercial purpose. Mr. A should get himself registered in the HP if the Total rent exceeds Rs. 10 lakh in the financial year and Himachal Pradesh being a special category State.
Mr. A, resident of Himachal Pradesh owns two properties, one in Chandigarh and another in Delhi and given them on rent for commercial purpose. Both properties being outside HP, it will be a case of interstate supply and thus registration will be required immediately as no exemption of Rs. 10 lakh will be available. He will charge IGST for both the properties in Chandigarh and Delhi.
Mr. A, resident of HP, owns a residential property in Chandigarh. He also owns a commercial property in HP. His rent from residential property is Rs. 4 lakh per annum and from rents for commercial property in HP is 7 lakh. Is he required to register?
In this case, although his total rent from commercial property is less than 10 lakh and is from within the state, his aggregate turnover will include rent from residential property in terms of section 2(6) of the CGST Act and hence he will be liable to register Himachal being a special category state.
CA Alok Krishan is a practicing Chartered Accountant with a professional degree in law at Chandigarh. He has a strong 22 years post qualification experience out of which around 10 years has been with corporate sector and the balance as a practicing Chartered Accountant with specialisation in Indirect Taxes. The views expressed are his personal views and source of law should be referred to before relying on the same.