What is GST?
GST (Goods and Services Tax) is an indirect tax charged on the supply of goods or services or both. It can also refer to a tax agreed to be made in the course of a business.
In law, the occurrence of a taxable event triggers the imposition of tax. Under the GST Law, supply is a taxable event.
How does GST come into the picture for rental income?
Therefore, as per the GST Law and its definition, supply includes all the forms of goods, services or both, such as sale, transfer, barter, exchange, license, rental, lease, or disposal a person makes or agrees to in business.
Thus, it is clear from the definition that GST also covers income from renting and leasing properties.
Nature of supply
The following are considered to be a supply of services as per Schedule II of CGST Act, 2017:
- Any lease, tenancy, easement, or license to occupy land
- Any lease or letting out of a building, including a commercial, industrial, or residential complex for business or commerce
- Renting immovable property
Applicability of reverse charge mechanism
Usually, the supplier collects GST and deposits it with the Government within the prescribed due dates before filing GSTR-3B. This is called the forward charge.
However, there are certain cases covered by 9(3) of the CGST Act and S 5(3) of the IGST Act where the tax is to be paid by the recipient of supply – the person who receives the services. This is called the reverse charge on rent under GST.
When is this reverse charge mechanism applicable? Let us look at a few cases where it is, and a few exceptions:
1. The government provides services to business entities like renting immovable property.
- If the recipient is registered under the GST Act – they must pay tax under reverse charge
- If the recipient is not registered under the GST Act – the supplier must pay tax (forward charge)
2. The supplier is a regular person. The recipient is a promoter.
- Nature of transaction – Long-term lease of land (30 years or more) against consideration in the form of the upfront amount, which is called premium, salaami, etc.
- Taxability – If the constructed flats are sold after the issuance of the completion certificate, then such consideration is taxable under the reverse charge mechanism.
3. Renting of motor vehicles
1. GST applicable @ 5%
- Supplier is not a body corporate*, but the recipient is – reverse charge mechanism is applicable
- Supplier and recipient are both not body corporate – forward charge mechanism is applicable
- Supplier is a body corporate – Forward charge applicable.
*Under GST Law, body corporates refer to companies incorporated outside India.
2. GST applicable @ 12%
The forward charge is always applicable.
What are the renting and leasing services exempted from tax?
Exempt supply has been defined as the supply of goods, services, or both which attracts a zero rate of tax. It includes non-taxable supply, according to S. 2(47) of the CGST Act of 2017. The central government notifies such exemptions from time to time. All the states then make amendments in the state laws accordingly.
Let us look at a few examples.
1. Services provided by charitable institutions registered under Section 12AA of Income Tax Act, 1961 to any person are exempt from tax provided. They are covered under the definition of charitable activities under Notification No. 12/2017. So, if a charitable trust rents out its property for charitable activity, the income derived is exempt from GST.
2. Entry 13 – Exemptions for religious activities. In this case, the suppliers are trusts under Section 12AA, 10 (23C), or bodies under Section 10 (23BBA) of the Income Tax Act, 1961.
Transactions renting out religious places to the general public are exempt from GST, if:
- Charges for the renting of premises, community halls, wedding halls, open areas, etc. are less than Rs. 10,000 per day.
- Charges for renting of rooms are less than Rs. 1,000 per day.
- Charges for renting of shops or other spaces for business or commerce are less than Rs. 10,000 per month.
In such cases, where transactions are exempt from GST for a rent limit, the recipient can be any person.
3. Entry 12 – Renting of residential property are subject to taxation as follows:
- Residential property for residential purpose – exempt
- Residential property for commercial purpose – taxable
- Commercial property for the residential purpose (e.g.: company guest house) – taxable
- Commercial property for commercial purpose – taxable
4. Entry 24, 24A, 24B – Agricultural services, which includes storage or warehousing services for rice, minor forest produce, and other items such as cereals, pulses, vegetables, tea, and others, are exempt from tax. The supplier and the recipient can be any person.
5. Entry 54 – Service related to agriculture or agricultural produce, i.e. agricultural operations, which includes renting or leasing agro machinery or vacant land with or without a structure incidental to its use
6. Entry 74 – Rent of rooms provided to in-patients in hospitals, as notified on January 27, 2018
7. Entry 9 – For transactions involving renting immovable property, a gross amount under Rs. 5,000 is exempt from GST. The supplier can be the government or local authorities. The recipient will be a business entity.
8. Entry 41A, 41B – In the supply of services in the form of the long-term lease of land by the landowner to the developer, the premium paid is exempt from tax. However, the constructed flats must be sold before a completion certificate is issued and taxes are paid on such a sale.
9. Entry 22 – Hiring motor vehicles is exempt from tax in certain conditions. Here, the supplier can be anyone, and the recipient can be:
- State transport authorities hiring vehicles with a seating capacity exceeding 12
- Local authorities hiring vehicles with a seating capacity exceeding 12
- Goods transportation agencies
- Any person providing services to educational institutions up to higher secondary school for transportation of students, faculty, and staff.
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Q. How do we determine the state in India where the services related to renting immovable property have been provided?
Ans. The basic principle of GST is that it should effectively tax such supplies at the point of consumption. The Place of Supply provisions determines the place that is the jurisdiction where the tax should reach. The point of sale and the location of the supplier are the two determinants to ascertain the nature of supply, whether it is intrastate or interstate supply.
If the location of supplier and recipient are in India:
Nature – Services related to immovable property
POS – Location of such immovable property
If such immovable property is outside India, then the taxable jurisdiction is the location of the recipient. If the location of immovable property is in multiple states or union territories, then each such location of the immovable property is a taxable jurisdiction.
Q. How to determine the month in which rental services will be taxable?
Ans. As per the Time of Supply (TOS) Provisions, in the case of services:
- If the invoice is issued within the due date as per S31 of CGST Act, 2017, TOS will be earlier than I or P.
- If the invoice is not issued within the due date as per S31 of CGST Act, 2017, TOS will be earlier than S or P.
I – Date of Invoice
S – Date of provision of services
P – Date of payment. This is earlier than the date when the transaction is recorded in account books, or the date when the payment is credited.
Q. What are tenancy rights? Is it taxable under GST?
Ans. Let’s understand this with an example.
Mr A is the owner of a shop and has rented the same to Mr B.
Mr B now wants to rent a small space to some other person, say, C. Therefore, he pays a lump sum amount to A so that he is entitled to rent out the space to another person.
This is known as payment for Tenancy Rights and is subject to GST (after considering any exemptions). It will not be treated as the sale of land or a building. Moreover, even if one had paid stamp duty or any other registration charges for such rights, it will not affect its taxability under the GST Law.
Q. What is the tax rate applicable for services provided when renting an immovable property?
Ans. Normally, these services are taxable @ 18%. This is a compilation of some important provisions of the GST Law to analyse the taxability and impact of GST on rental income in India.