GST on rent
GST (Goods and Services Tax) is a tax that is levied indirectly on the provision of goods and services. Every value addition is subject to this multi-stage, destination-oriented tax, which replaces a number of indirect taxes like VAT, excise duty, service taxes, etc.
Until July 17, 2022, the rent of a business property was subject to GST. This exception that had previously been given to residential unit rentals under the GST regime has been eliminated by the GST Council. From July 18, 2022, GST will be levied if the dwelling is rented or leased by a GST-registered person or entity. The 47th GST Council meeting suggested that the tenant pay 18% GST on a reverse charge basis (RCM). However, they are able to deduct this amount from their GST filings while still paying sales tax.
The new GST or goods and services tax laws on rent that went into effect on July 18th have been clarified by the government. In a tweet, PIB said that “renting of residential units is taxable only when it is rented to a business entity.” It further clarified that “no GST when it is rented to a private person for personal use; no GST even if the proprietor or partner of the firm rents residence for personal use.”
Impact of GST on rental housing
A GST-registered renter will now be required to pay GST on rent through the reverse change mechanism and then claim input tax credit (ITC) on the amount actually paid. However, be aware that the Central Goods and Services Tax Act’s Section 17(5)(g) prohibits the use of the GST paid for any services for “personal consumption” as an input tax credit. It only applies to purchases made for “business purposes.”
According to Vivek Rathi, director of research for Knight Frank India, the decision may limit the growth of rental real estate in India by increasing the tax burden on companies who lease out residential properties to be used as guest houses and housing for their staff.
“If someone pays a monthly rent of Rs 1 lakh, the property value would be in the range to Rs 5 crore-Rs 6 crore. The GST, which will be around Rs 18,000, will burn a hole in the pocket of the tenant and eventually, the property owner, as the tenant may want to negotiate the rent. That means there would be a lesser number of people coming forward to provide properties for rental, as their rental income might be adversely impacted. This may also impact luxury housing demand and projects, as investors may not want to invest,” Pankaj Kapoor, founder and MD of Liases Foras, was quoted by the media as saying.
However, the individual who pays the GST on the rent can claim a credit against other tax obligations. This means that ITC (input tax credit) on GST paid on rent can be claimed if all requirements for claiming Input Tax Credit are met.
Difference between GST on rent and GST on rental income
GST on rent and GST on rental income are different concepts. GST on rental income concerns the landlord. It is when the landlord becomes liable a certain GST amount on whatever income he has in the form of rent.
GST on rent, on the other hand, concerns the tenant. If the tenant is a GST-registered entity, and uses a residential property for business purposes they would need to pay a GST amount, which is often included in the rent. This means that GST would be applicable on their rent.
In short, GST on rental income is paid by the landlord while the GST on rent is paid by the tenant.
Does GST on rent apply to you?
Under the new regulations, only tenants who are GST registered are subject to tax. Who are these GST-registered individuals, then? For service providers and suppliers of products, the annual threshold limit for GST registration is Rs. 40 lakh and Rs. 20 lakh, respectively. This implies that the salary class, which is typically not enrolled for GST, is free from paying GST on rent.
For those who have registered for GST, the tax will be assessed via the reverse charge mechanism (RCM), making the tenant responsible for paying it instead of the owner. For instance, if a business rents apartments to house staff, it is regarded as a tenant and is responsible for paying the GST. Under the reverse charge system, the recipient of a good or service rather than the provider of that good or service is responsible for paying tax.
Apart from this, properties rented for commercial or business use are subject to GST on rent. The rental revenue and rent paid from a residential property may both be subject to tax under the GST scheme, even if it is rented out for commercial or corporate reasons. It is crucial to note that, regardless of how the property is used, your GST liability will remain in place as long as you have rented it out for commercial purposes.
The GST on rental revenue would not be applicable if a landlord had rented out his residential property to a person who was not registered for the GST for residential use.
Rate of GST on rent and rental income
In case, the above mentioned points apply to you, you’d need to pay GST. The Ministry set the GST rate on rent at 18%, and the place of supply will serve as the immovable property’s location.
How to calculate GST on rented out properties?
For commercial properties that are rented out, the GST is computed and applied to the total amount of the periodic rent collections.
The GST (either 9% CGST and SGST or 18% IGST) will be computed on the rent due when an invoice is raised every period.
How to pay GST on rent?
The landlord will be required to register and submit tax if GST is applicable to rental revenue. As for the tenant, as mentioned before, GST would be applicable to their rent. This means, they would be paying GST along with their rent – as a part of it.