In India, the application of GST on rent varies depending on the type of property. While residential properties used solely for living purposes are exempt from GST, commercial property rentals are subject to an 18% GST rate. This tax is typically paid by the tenant along with their rent.
Landlords are required to register under GST if their annual rental income surpasses Rs. 20 lakhs, or Rs. 10 lakhs in special category states. This introduction to GST on rent encompasses key aspects such as taxation protocols, calculation methods, input tax credits, and specific exemptions for certain property types.
With, GST council now planning to bring renting of commercial property under Reverse Charge Mechanism (RCM), the liability to pay GST will shift from the supplier, that is the landlord, to the recipient or the tenant of the commercial rental services. Moreover, the GST under RCM is expected to be 18 per cent which would bring tax parity (with registered commercial real estate). The tenant will be eligible for Input Tax Credit (ITC) for the GST paid under RCM.
Sharing his perspective on the 54th GST Council meeting on 09th September, recommending several changes in the GST rates, Ranjeet Mahtani, Partner, Dhruva Advisors said, “The Council had in September 2022 re-constituted the Group of Ministers (‘GoM’) to examine and suggest ways to boost Real Estate Sector. The GoM was to suggest ways for composition scheme or any other scheme for boosting real estate sector, examine legality of inclusion/exclusion of land in the composition scheme, examine various aspects of levy of GST on the Transfer of Development Rights (‘TDR’) including in a Joint Development Agreements (‘JDA’). A status report by the GoM was tabled in the 54th Council meeting and, it was to present its final report by the end of October 2024. The final report will then be taken up during the next meeting of the Council, proposed for November.
The Council did clarify on a pricky issue of Preferential Location Charges (‘PLC’) collected by developers providing construction services. It is clarified that PLC paid along with the consideration for the construction services of residential/ commercial/industrial complex is a bundled service (i.e. composite supply) and taxed as the main supply of construction services viz. 1% or 5%, as the case may be. This issue arose for clarification since invoices (from developers/builders), typically, showcased these charges as a separate line item. This clarification will ensure uniformity in the industry.
During the service tax regime, the Tribunal in many cases ruled that PLC and other charges such as External Development Charges (‘EDC’), Internal Development Charges (‘IDC’), club membership etc. are naturally bundled and are provided in the ordinary course of business.”
THE COMMERCIAL PROPERTY RENTING
During the 54th GST Council meeting, the renting of commercial properties has been brought under the Reverse Charge Mechanism (RCM), according to Revenue Secretary Sanay Malhotra. The decision aims to simplify compliance for businesses and increase the efficiency of tax collection.
Shrinivas Rao, FRICS, CEO, Vestian explained, “Earlier, Goods and Services Tax (GST) was charged under Forward Charge Mechanism (FCM) only while renting a commercial property by a GST unregistered person (landlord) to a GST registered person (tenant). This caused significant revenue leakage for the government as the Reverse Charge Mechanism (RCM) was not applied. To stop the revenue leakage and widen the purview, the GST Council included this under RCM which may increase compliance for GST-registered persons (tenants).”
Rao further added, “Moreover, the government has clarified theGST liability on location charges or Preferential Location Charges (PLC) on residential/commercial/industrial complexes and bundled them under construction services reducing the tax liability from 18% to 5%/12%. This is likely to reduce friction between developers and tenants and ensure transparency.”
Harpreet Singh, Partner, Deloitte India expressing similar views stated that the decision to bring renting of commercial property from unregistered supplier under reverse charge will increase compliances for registered taxpayers as this would require determination of GST liability on all their place of business under lease.
TAX TREATMENT OF PREFERENTIAL LOCATION CHARGES
Preferential Location charges (PLC) is a charge which the builder takes from the buyer for allocating a preferred/ better location for a particular unit within a complex or building. As per the GST Council the Preferential Location Charges (PLC) paid along with the price for property construction forms a part of the same supply, i.e., construction services and hence should be liable at the same rate at which construction services are taxed.
The government statement clarifies that PLC paid along with the consideration for the construction services of residential/commercial/industrial complex before issuance of completion certificate forms part of composite supply where supply of construction services is the main service and PLC is naturally bundled with it and are eligible for same tax treatment as the main supply that is, construction service.
“Residential construction is liable to tax @ 5% and commercial construction is liable @ 12%. The issue around taxability of PLC was whether the same is sepa- rate and distinct service liable to tax at the standard rate of 18% or is to be treated as part and parcel of construction service liable to respective rates of 5% / 12%. There are favorable rulings under the erstwhile service tax regime which have held that construction and PLC service is to be treated as ‘bundled service’. However, there were few adverse Advance Rulings under the GST regime, which have held that PLC is a separate service liable to tax at the higher rate of 18%. Accordingly, this clarification would finally assuage the concerns of all builders by putting to rest any doubt on taxability of PLC,” added Harpreet Singh.
In conclusion, the GST revision of rental commercial properties is viewed to streamline tax compliance and provide relief to businesses but, also with a catch of increased burden on the tenants. The finance experts believe, this move is a way to increase tax revenue for the government by making the renting of any prop- erty taxable, if used for business purposes, irrespective of the owner of the property being registered or unregistered in GST.
The decision to place renting of commercial property from unregistered suppliers under reverse charge will increase compliance burdens for registered taxpayers because it will necessitate the calculation of GST liability on all of their leased places of business. This also aligns with the broader goals of the GST regime in reducing tax evasion and bringing more transactions into the formal economy.
The commercial property will now come under the reverse charge mechanism, under which the liability to pay GST shifts from the supplier, that is the landlord, to the recipient or the tenant of the commercial rental services.
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