Summary: The Goods and Services Tax (GST) has introduced separate regulations for rental of residential and commercial properties in India. Generally, rentals of residential properties are exempt from GST unless the property is rented to a registered person. In such cases, the registered tenant must pay GST under the Reverse Charge Mechanism (RCM). Since July 18, 2022, this provision applies to residential rentals from any person to registered individuals. Conversely, commercial rentals are subject to GST, and a recent amendment, which came into force on October 10, 2024, expands the MRC to include rentals of commercial properties when rented by unregistered persons to persons registered. This change is aimed at mitigating the revenue loss identified by the GST Council in its 54th meeting. The taxability of rentals is clarified through different scenarios: exempt rentals arise when an unregistered supplier rents a residential property to another unregistered individual; forward charge mechanisms (FCMs) apply when registered suppliers rent to unregistered recipients; and the RCM is applicable for rentals between registered persons. To further clarify these provisions and interpretations, additional guidance from the CBIC is awaited. Understanding these distinctions is crucial for landlords and tenants to navigate the complexities of renting properties under GST.

Introduction: The Goods and Services Tax (GST) has significantly transformed the tax landscape in India, impacting various sectors, including real estate. When it comes to property rentals, GST implications differ for residential and commercial spaces. Although residential property rentals are generally exempt from GST under certain conditions, GST applies to commercial rentals and affects both landlords and tenants. This article looks at the GST framework on property rentals, highlighting the tax, exemption and compliance requirements for property owners and businesses. Understanding these provisions is essential to understanding the complexities of renting under the GST regime.

EXEMPT ENTRY
As per entry #12 of Notification n°12/2017-Central Tax (Rate) of 06-28-2017Services by way of rental of residential accommodation intended for use as a residence are exempt from GST levy.

However, no such exemption is available where the accommodation is rented to a registered person.

MRC REGISTRATIONS

According to Entry No. 5AA of Notification n°13/2017-Central Tax (Rate) of 06-28-2017The service through the rental of residential accommodation by ANY PERSON to a registered person is subject to the Reverse Charge Mechanism (“RCM”). This entry was applicable on July 18, 2022.

The above entry implies that the registered beneficiary, availing the rental services of a residential property, is expected to pay GST on the basis of MRC. In this case, the RCM applies even if the supplier is not registered or if the property is used for commercial purposes.

Recently, Entry No. 5AB is added to the MRC levy notice on commercial properties. Said entry specifies that the RCM is applicable to the Service by way of rental of any property other than residential accommodation by an unregistered person to a registered person. This entry is applicable from October 10, 2024.

Notably, Entry No. 5AB was introduced as per the recommendations made by the GST Council in its 54th meeting held on September 9, 2024, wherein it was recommended to bring rental of commercial property by a person not registered to a person registered under the Reverse Charge Mechanism (RCM) to prevent revenue. leak.

From a combined reading of Entry No. 5AB with the relevant recommendations of the GST Council, it can be inferred that the Reverse Charge Mechanism (RCM) is applicable to rental of commercial real estate (such as offices, shops, warehouses, shopping centers, etc.) when rented by an unregistered person to a registered person. However, an alternative interpretation suggests that the MRC could apply to all types of commercial property, including personal property. This alternative interpretation arises from the words “all property’ as shown in the entry.

In this context, further clarifications from the CBIC are awaited to remove the ambiguity.

VARIOUS TAXABILITY SCENARIOS

The above discussion is summarized in tabular form for ease and better understanding of the above-mentioned provisions.

The table below summarizes the GST collection on the rental of residential property in various scenarios:

The table below summarizes the GST collection on commercial property rentals in various scenarios:

FCM: Tax must be paid by the supplier under the forward fee mechanism

RCM: tax must be paid by the recipient under the reverse charge mechanism

Disclaimer:
The information contained herein is not intended to be a source of advice and is intended for user convenience and educational purposes only. This is not an opinion addressed to anyone and the author is/will not be responsible to anyone for any matter whatsoever regarding reliance on this article.