The government introduced GST in India to implement a single tax structure that yields increased transparency and accountability. Like the other sectors, GST impacted the real estate and its various aspects such as construction, sale, purchase, lease, rent etc.
For instance, Real Estate Regulation and Development Act (RERA), a single regulator for the real estate sector, was implemented to bring standardization, better governance and disclosure practices in the real estate sector. Similarly, concessional rates of GST were extended to houses constructed for various segments like economically weaker sections, slum dwellers etc.
Furthermore, various provisions were laid down for determining GST on rental income such as defining taxable services under GST, place of supply, exemption limits for GST in case of services etc.
This article talks about the impact of GST on rent, that is both GST on house rent and GST on commercial rent. And its meaning for residential and commercial property investors in India.
Tax on Rent Before GST
Basic Exemption Limit of Rs. 10 lakhs for Service Tax Registration
As per the indirect tax regime prior to GST, the owner or the landlord of the property was required to avail service tax registration. However, this was applicable only if the total of the taxable services provided by him, including the income from rent on all properties owned by him, was more than the basic exemption limit of Rs. 10 lakhs per year.
In other words, an individual having a rental income of more than Rs. 10 lakhs in a year was required to obtain service tax registration. Accordingly, any person having a rental income of less than Rs. 10 lakhs in a year was exempt from getting registered under service tax and was not liable to pay tax.
Tax on Commercial Rent, No Tax on Residential Rent
Service Tax on Residential Rent
As per the service tax act, rent received from the residential property given on rent for residential purposes was exempt from service tax liability. In other words, taxable services under service tax did not include rent received from residential property let out on rent for residential purposes.
Therefore, even if an individual had a residential rental income of more than Rs. 10 lakhs in a year, he or she was not liable to pay service tax.
However, any residential property given on rent for commercial purposes came under the service tax net and was therefore taxable.
Service Tax on Commercial Rent
As per the service tax law, rent received from commercial property came under the service tax purview and was therefore subject to service tax.
Therefore, any individual whose rental income from commercial properties owned by him exceeded Rs. 10 lakhs per year was liable to pay service tax on such income.
And the rate of service tax charged on rent received from commercial properties was 15%.
GST on Rent
Before getting to the renting of immovable property under GST, it is first important to understand certain concepts under GST. These include ‘taxable services under GST’ and ‘place of supply under GST in case of services’.
Taxable Services Under GST
As per schedule II of the CGST Act, 2017, renting of immovable property is treated as taxable services under GST. However, only a specific type of renting of immovable property is included under taxable services. These include:
- Any lease, tenancy, easement, licence to occupy land
- Lease or letting out of the building including a commercial, industrial or residential complex for business or commercial purposes, either wholly or partly
Since the above mentioned activities are taken as ‘taxable services’, they are subject to GST.
Place of Supply of Services Under GST
Section 12(3) of the IGST act defines the place of supply of services in case of services provided with regards to the immovable property.
Accordingly, in case of services such as granting rights to use the immovable property, the place of supply would be the location of the immovable property.
Given these concepts in the backdrop, let’s understand the rules regarding applicability of GST on rental income from both commercial as well as residential properties.
GST on Rental Income from Residential Property
Much like the previous indirect tax regime, the residential properties let out for residential purposes continue to be exempt under GST as well. Accordingly, as per notification no. 12/2017 – Central Tax (Rate), services by the way of renting of residential dwelling for use as residence attract ‘Nil rate’ of GST.
However, residential properties given on rent for business purposes come under the ambit of GST and therefore are subject to GST.
GST on Renting of Immovable Property for Commercial Purpose
One of the major changes brought about by the introduction of GST is the subsuming of different taxes imposed separately on goods and services. A single goods and services tax is applicable on both goods and services.
As mentioned above, immovable properties let out for business or commercial purposes fall in the purview of GST and are therefore subject to GST.
When does GST on Commercial rent Become applicable?
The exemption limit for services under GST has been increased as compared to the previous indirect tax regime. Where the exemption limit under the previous indirect tax structure was Rs. 10 lakhs, it has now been increased to Rs. 20 lakhs under GST.
Accordingly, individuals having a commercial rental income of more than Rs. 20 lakhs a year are liable to pay GST on such income. Thus, with the implementation of GST, many individuals who were covered under the previous indirect tax law are now excluded from the purview of indirect tax.
GST on Commercial Rent
Any immovable property let out for business or commercial purposes is subject to GST at the rate 18%. Thus, GST at the rate of 18% is applicable on the taxable value. Taxable Value is nothing but the amount of rent received from the commercial property owned by the individual.
As mentioned above, the commercial rent received must be more than Rs. 20 lakhs a year. The amount of commercial rent less than Rs. 20 lakhs a year shall not be subject to GST.
Also, it must be noted that renting out of a religious place owned and managed by a registered charitable or religious Trust for the public shall be exempt from GST. However, such an exemption may not be applicable to cases where:
- the room rent is Rs. 1000 or more per day
- rent for premises, community hall, open area etc is Rs. 10,000 or more per day
- the rent for shops or commercial spaces is Rs. 10,000 or more per day
What is the Place of Supply in Case of GST on Commercial Rent?
The place of supply in case of rent received from an immovable property let out for business purposes would be the location of the immovable property.
For example, Umang, who lives in Delhi, is the owner of the guest house located in Mumbai to Pixel Pvt Ltd for commercial use. Although Umang resides in Delhi, the place of supply of such a service would be Mumbai as the guest house is located in Mumbai. Therefore, GST would be divided between the centre and Maharashtra state as follows: CGST 9% and SGST 9%.
ITC for GST on Rent
The individual paying GST on rent can avail input tax credit for the same and utilize it against the payment of GST that he is required to pay.
In other words, if the individual meets the criteria for availing ITC, ITC can be claimed for GST paid on rent.
TDS on Rent
The owner of the immovable property that is given on rent needs to collect GST from the person paying the rent. GST is charged on the amount of rent charged by the owner from the person.
Further, the person who pays the rent is required to deduct income tax at source at the rate of 10%. TDS is, however, applicable if the amount of rent to be paid on the property exceeds Rs. 1.80 lakhs per year. Further, TDS applies both to residential and commercial Properties. Alos, no GST is charged on TDS.