Impact Of GST On Rent

Residential rental is subject to a different GST treatment than commercial renting. On the other hand, if you own and operate a business, then the payment of rent is one of those significant expenses, and you may be interested in learning whether or not you are qualified to claim an input tax credit (ITC) on the GST that was paid on the rental expense. Let's get a better grasp on each of these.

Before the implementation of GST, a landlord was required to apply for and receive a service tax registration if their total taxable services (including the rental income from all of their properties) exceeded Rs.10 lakh annually. The property owner is exempt from paying service tax so long as the annual rental revenue (from all of the properties that have been rented out) does not exceed Rs.10 lakh.

Under the former tax system, the only properties that were subject to service tax were commercial premises that were rented out. This holds true even in the case where a residential property is utilized for business reasons. For commercial properties, a service tax equal to fifteen percent of the rent was collected. In addition, the service tax was not applicable to the income derived from renting residential premises.

In accordance with the Goods and Services Tax Act, the provision of services would apply to the renting out of the immovable property. The Goods and Services Tax (GST) will, however, only be applied to specific types of rent, such as:

• When a piece of property is rented, leased, or granted an easement, or when a license to occupy it is issued,
• When a property, whether it be residential, commercial, or industrial, is rented out for commercial purposes, the transaction is known as "leasing" or "letting."

This particular kind of renting is regarded as a provision of services and, as such, would be subject to taxation. Residential property is exempt from the Goods and Services Tax (GST) if it is rented out for residential purposes. Because it would be considered a delivery of services rather than a supply of goods, any other kind of business-related leasing or renting out of immovable property would be subject to the standard 18% GST rate.

Any taxpayer whose taxable income exceeds the threshold at which exemptions apply must register for GST and pay taxes. Therefore, the value of the property that you have transferred to a business is subject to taxation if you have done so. You are required to register for the Goods and Services Tax (GST) if the amount of money you make from your business, including rent and any other exempted revenue, is more than Rs. 20 lakh per year.

The limit for people who only provide services is higher than the limit for the Service Tax, which is Rs.10 lakh. The threshold limit for those who only offer services is Rs.20 lakh. Because of this, many landlords who were previously subject to the Service Tax regime can relax now that they have the potential to earn an additional ten lakh rupees.

(It is important to keep in mind that the threshold limit of Rs.20 lakh does not apply to the particular category states; in those states, the maximum continues to be Rs.10 lakh.)

Let's take a look at an example: Manish lives in Bangalore, but he owns a property in Hyderabad that he lets B Ltd. use as a guest house. Manish rents out his property in Hyderabad. Simply from the rental revenue of the Hyderabad house, he is bringing in 30,000 rupees per month, which amounts to 3,60,000 rupees per year. According to the Goods and Services Tax (GST), the location of the immovable property is considered to be the place of supply.

Because of this, even though the individual in question lives in Bangalore, the site of supply will invariably be determined by the property's location, which in the given scenario is Hyderabad. As a result of the fact that Manish's annual total income is less than Rs. 20 lakh, he is exempt from the Goods and Services Tax.

It is important to note that even though this property is rented out to individuals for residential use, the rent that is collected cannot be considered to be that of the rent collected from the residential property because this property is leased to a business for their own purposes. Therefore, the manner in which they utilize the aforementioned property is not a criterion that will be considered.

It is possible for the landlord or owner of the property to have their registration in a state that is distinct from the state in which the property is physically located. The decision lies solely in the hands of the landlord. They are required to determine the place of supply to determine whether or not CGST and SGST will be charged, or IGST will apply. The cases prepared for you can be found in the following paragraphs.

Scenario 1: In this first example, the taxpayer lives in a state that is not the same as the one in which the rented property is located.
The location of the property is going to be the spot where supplies are kept. As a result, it qualifies as a supply made across state lines, which means that IGST must be applied.
For instance, if Mr. ABC, subject to GST in Bangalore, has rented out a business property in Haryana, then an IGST equal to 18% will need to be paid. In Haryana, he does not need to register for the Goods and Services Tax (GST).

Scenario 2: The landlord and the tenant have their legal residences registered in the same state as the property's physical location.
If the landlord is registered with the GST in the same state where the property is located, then the tenant will be responsible for paying both the CGST and SGST, which come out to 9% each.
For example, Mrs. XYZ, registered in Maharashtra and renting out her commercial property in Hyderabad, would have to pay CGST and SGST at the rate of 9% each.

Scenario 3: The landlord is registered for GST in the same state in which the rental property is situated, but the tenant is written in a different state
If the landlord obtains GST registration in the same state where the property is located, then the transaction is considered to take place inside the same state. Therefore, regardless of where the tenant is registered for GST, they will be required to pay the combined CGST and SGST tax rate.
If the tenant is not registered in the same state as the property's location, then he will not be able to claim the input tax credit for CGST and SGST that is available in such situations.
For example, Mr. PQR from Kochi goes to Bhopal for a meeting with a client and stays at the ABC Hotel while he's there. He makes a reservation and the rent for the room is 15,000 rupees.
The ABC Hotel's proprietors have their business registered in Bhopal, which is also the city in which the hotel is situated. Therefore, the CGST and the SGST would need to be levied in this scenario. However, the two aspects of the tax are distinct from one another.
Since this GST was paid as CGST and SGST of a different state, Mr. PQR is unable to claim the ITC for it because it was delivered in a state that is not the one in which he is registered.

The goods and services tax (GST) will be imposed at an 18% rate on the taxable value of any and all business spaces that are rented out, and rent will be regarded as a taxable supply of service.
The Goods and Services Tax (GST) does not apply if a registered charitable or religious trust owns and operates a spiritual place open to the general public. However, this is only possible if the daily fee for these rooms is less than one thousand Indian rupees.
Less than Rs 10,000 is required as monthly rent for retail establishments and other commercial spaces.
The daily rent for community halls or other open places is significantly less than Rs 10,000.

When commercial properties are rented out, the Goods and Services Tax (GST) is computed and levied on the total rent to be collected periodically.

If an invoice is sent out at the end of each period, the applicable taxes (either 9% CGST and SGST or 18% IGST) will be added on top of the rent owed.

The individual responsible for paying GST on rent can, in most cases, claim a credit for the tax paid against the payment of his other tax obligations. In other words, if all of the requirements for claiming input tax credit are satisfied, it is possible to claim ITC on GST that was paid on rent.

The input tax credit may be claimed for the GST that was paid to cover expenses such as repairs and maintenance, brokerage fees, and so on that were related to a property that was rented out but only to the extent that the GST was not capitalized. A taxpayer cannot claim the input tax credit for any amount spent on a select group of expenses due to Section 17(5) of the CGST Act.

The acquisition of any goods or services used for the construction of an immovable property on its account, including for the furtherance of business by a taxable person, is an example of one of these expenditures that do not qualify for an ITC claim. However, ITC claims can be made for the remaining expenses, such as repairs and brokerage fees on the rental property, as long as the landlord does not capitalize these costs in their books.

The individual who is responsible for paying rent must be the one to deliver the Goods and Services Tax (GST). The GST payment must be made to the owner of the property. The rent that is charged will include this GST amount. If the rent for the property is more than Rs.2.40 lakh per year, beginning with the fiscal year 20-21, the person who pays the rent is required to withhold income tax at the source at the rate of 10%. The TDS is applied on both commercial and residential premises alike. The TDS will be exempt from the GST.

It is imperative that you keep in mind that the Reverse Charge Mechanism will apply to the GST levied on the rent for immovable properties charged by the government or local authority to a registered person. However, if the property is rented out to an individual not registered for GST, the government will deduct GST from the rent themselves (Forward charge mechanism).