Real estate companies that rent out commercial spaces have found themselves in a tight spot after the Maharashtra Authority for Advanced Ruling (AAR) ruled that payment of utility bills — electricity, water and cooking gas, among others — by the lessee will be treated as consideration for part of the composite supply, and will attract the levy of goods and services tax (GST).
The applicant in the case said it is engaged in the business of ‘facility management’. It leases out immovable properties at a fixed monthly rent, and also recovers expenses incurred in paying utility bills from the lessee. The applicant argued that recovery of utility bill expenses should be considered as reimbursement as these vary each month on the basis of consumption as opposed to rent which is always fixed under the contractual agreement.
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The AAR in its order, however, said the provision of utilities such as electricity is in the nature of ancillary supply which helps in better enjoyment of the main supply that is “renting”. Further, it ruled that facility provided to lessee in the form utility services formed part of composite supply which would attract GST at the same as is payable on payment of rent.
“Facility management companies in the real estate sector are not charging any GST on utility charges, especially distribution of electricity on the premise that such charges are recovered on the actual basis from customers. Twin rulings from the AAR-Maharashtra and the Kolkata High Court — categorically and unconditionally rejecting the views of the taxpayer — has placed all such companies in a tight spot,” Rajat Mohan, partner at AMRG & Associates, said.