Only GST-registered tenants face 18% tax on rent paid, say experts

According to the new goods and services tax (GST) rules that came into effect on July 18, a tax of 18 per cent will have to be paid on residential property rent. This tax will be paid according to the reverse charge mechanism (RCM), which means the tenant will be liable to pay it.

Sandeep Bajaj, managing partner, PSL Advocates & Solicitors, says, “Renting an immovable property is treated as a supply of service under the GST Act. Hence, the rent, i.e., the consideration paid for the service, is liable to GST.”

The impact

The imposition of GST on rent will affect several stakeholders.

Ashutosh K Srivastava, senior associate, SKV Law Offices, says, “It will have a significant impact on India’s rental landscape. Businesses will have to factor in the additional expense of 18 per cent over and above the rent they pay for accommodation and guest houses.”

Providers of co-living services will also take a hit.

Sunil Kumar, deputy general manager, Taxmann, says, “The primary purpose of amending the GST law is to tax businesses engaged in providing co-living spaces on rent. However, the drafting of the law suggests it will also adversely impact many small individual GST taxpayers received the residential property on rent.”

Who comes within its ambit?

According to experts, this new levy will apply only to those tenants who have GST registration. It will not apply to every salaried person living in a rented accommodation.

Archit Gupta, chief executive officer, Clear, says, “Suppose you are a gig worker, someone providing consultancy service, or an e-commerce seller working out of a rented home: if the law is interpreted liberally and if you are using the place purely for residential purposes without claiming rental expense as a business expense deduction in your income-tax return (ITR), you can refrain from paying GST.”

However, if you show the rental expense as deduction in your ITR, you will have to compute and pay GST. The RCM means the recipient of the service must calculate GST on the value of the service and deposit it (not the supplier).

If owner is unregistered

One common query is what happens when a person not registered under GST rents a residential property to a person registered under GST. 

Aditya Chopra, managing partner, Victoriam Legalis-Advocates & Solicitors, says, “In such a case, the tenant is liable to pay GST at 18 per cent under RCM.”

Ankit Jain, partner, Ved Jain & Associates, says, “Up until now, GST was chargeable on residential rent when the residential premises were used for non-residential purposes, such as offices, shops, or warehouses.”

Under the new regulations, however, GST is chargeable on rent paid when a GST-registered person rents a residential premise for any use. Even when an employee uses the premises purely for residential purposes, GST will have to be paid.

“If a company has taken a residential flat on rent for its employees, the GST on rent will have to be paid by the company — the tenant in this case. It may have to change the salary structure of an employee. It may either have to increase the cost-to-company of the employee or decrease the basic salary component to provide for GST,” says Bajaj.

How to pay GST on rent

The tenant will have to file a GST return and pay tax liability. Claiming input tax credit is permitted. Input tax credit means GST paid on the purchase of goods and services can be set off against future tax liability. The onus of proving a GST-registered tenant is not liable to pay GST lies with the tenant.

“The tenant is required to pay GST on rent if he/she is registered under GST. Else, he/she is not liable to pay GST. The tenant need not register just to pay GST on residential rent,” observes Jain.

Liability to deposit GST has fallen on the tenant

• A GST-registered individual receiving rental service is liable to pay GST under the reverse charge mechanism
• Individuals operating small shops and fulfilling sales orders through third-party online platforms (say Amazon, Flipkart, etc) will be liable
• These small businesses are mandatorily liable to register under GST law
• Such individuals will not be able to claim input tax credit on the GST paid by them on rent, as the service they have received is personal
• GST law allows input tax credit on expenses incurred in the course or furtherance of business
• Unregistered individuals receiving rental services will not be impacted

Source: Taxmann