By Smita Roy, Siddharth Tandon
Since GST was introduced, renting residential dwellings for residing was exempt. In a significant development, the government withdrew the GST exemption on such rentals where the lessee is registered under GST laws. Moreover, effective 18 July 2022, tax on such rentals is required to be paid by the lessee/tenant who receives the service on a ‘reverse charge’ basis. This has sparked an extensive debate as to whether GST is to be paid on such rentals by all categories of lessees i.e., individuals, partnership firms, companies, businesses, including the ones which are otherwise exempt from GST. A recent PIB tweet mentioned that renting of residential units is taxable at 18% when rented to a business entity. Further, such levy would not apply in case the premise is rented to a private person for personal use. While this is indicative of the overall intention, it is yet to be reflected in a corresponding notification or circular issued by the Ministry.
Also, as ‘residential dwelling’ is not defined in GST laws, it is unclear if the lease period or any other parameter has a bearing on what is covered in the tax net; the questions that arise are: Is GST applicable in case a residential unit is leased by a business entity and used by different senior executives while on a visit for business engagements? What happens when the premises are used for a minimum period of one year by a senior executive? Clarity on what constitutes ‘residential dwelling’ in this context is therefore pivotal to dissuade any adverse interpretation on this issue.
Furthermore, there is no clarity as to whether the lessee should be registered in the same State in which the residential unit is located or otherwise. What happens if a person registered for GST in Delhi enters into a lease agreement for a residential unit in Gurugram or Haryana? Will the person have to pay tax even if unregistered in Haryana? The point that requires immediate clarification is whether one would have to evaluate the registration status in each state where the residential dwelling is located, or whether liability will arise even if registered in a different state. If yes, then is the lease arrangement an inter-state supply (attracting IGST) or an intra-state supply (triggering CGST plus SGST)? Considering certainty of tax positions is an avowed objective of policymakers, the essentials of ‘who, what and when’ of this new levy needs clarity.
Interestingly, lessees are also faced with a conundrum since any person liable to pay tax under the reverse charge mechanism is mandatorily required to register under GST and undertake compliance. Will Company A, registered for GST in Delhi, be liable to register in each state where the residential unit is taken on rent for its employees? Alternatively, is the levy inapplicable since the company was not registered in the concerned state? This is adding to the woes of the industry as diverse views are being considered in a bid to comply with the new levy sans requisite clarity on this issue.
The next key question is whether the tax paid by Company A (in the above example) will be a cost? This is relevant as tax authorities may dispute credit eligibility on the ground that the rented residential unit is for the personal use of employees and not for business purposes. On the other hand, Company A can equally contest that since rented accommodation is made available to employees in pursuance of an employment arrangement, credit restriction based on the ‘personal consumption’ argument is not sustainable. Pending requisite clarity, compliance with the rigors of this levy is likely to trigger a minefield of disputes.
On first principles, this new levy along with its associated compliances do not seem to aid the government’s agenda for ‘ease of doing business’ and is rather poised in the opposite direction. Also, at a time when inflation pressures are high, the incremental cost of doing business would be detrimental for India Inc. The industry is grappling with several interpretational issues on the subject and desperately needs clarification from policymakers. One hopes that suitable clarifications concerns will be released at the earliest to avoid frivolous litigations on this issue.
(Smita Roy, Partner & Leader (North) – Indirect Tax and Siddharth Tandon, Partner – Indirect Tax, BDO India. Views expressed are the authors’ own.)