GST would apply if a rented residential building is sublet as hostel: AAAR

Residential properties taken on rent by families or individuals for own use exempted

Renting residential buildings to commercial entities that sublet them to educational institutions as hostels will invite goods and services tax (GST).

The Andhra Pradesh Appellate Authority for Advance Rulings (AAAR) has confirmed the AAR order in this matter.

AAAR ruled that such an arrangement is not exempted from GST via a notification issued by the Centre. The notification, amended in July last year, exempted residential properties taken on rent by families or individuals from GST but not by commercial entities.

The exemption to families or individuals was on the grounds that the transaction of supply ends with the recipient. However, in the case of commercial entities, the lessee is not going to use the rented property as ‘residence’ by himself but will sub-lease or rent it out to others, the order said.

The appellant, the owner of residential buildings, had executed a lease deed with a commercial entity, which had further sub-let the building to an education society to use it as a student hostel.

From the documents submitted by the appellant, AAAR found that the building given on rent was constructed as a “hostel building” and not as a residential dwelling. It was only to be used to further the business of the lessee – ie, running a hostel for students, executives etc.

The appellate authority noted that in this case, the requirement of the twin conditions of ‘renting of residential dwelling’ for ‘use as residence’ being intertwined and inseparable are not met and hence, could not be exempted from GST.  

The authority said that the end use has to be determined.

“The twin indivisible conditions of ‘renting of residential dwelling’ and for ‘use as residence’ have to be analysed on a case to case basis for availing of the exemption,” said Harpreet Singh, partner at KPMG. According to AAAR, one would need to identify the ‘end use’ of the residential dwelling to determine if the exemption was applicable, he added.

He said there is a strong view that bringing private hostels within the ambit of GST would lead to additional burden of tax on students, which goes against the broader objective of making education available to all.

Sandeep Sehgal, partner tax at AKM Global, added that prominence has been given to the purpose of the lease agreement that ordinarily does not qualify as a residential dwelling.

"The purpose of the exemption notification with respect to the renting of residential dwellings is to avoid the taxation of residential properties taken on rent by families or individuals, and not by commercial entities," he said.