Rental income beyond Rs.20 lakh to attract GST | Motilal Oswal
Rental income beyond Rs.20 lakh to attract GST | Motilal Oswal

Impact of GST on rental income from Commercial Property

When the GST Act was introduced there was a minor change made in the applicability of tax on commercial rental income. Prior to GST, the limit was fixed at commercial rental income of Rs.10 lakhs per annum whereas post GST, the limit was raised to Rs.20 lakhs per annum. Here is what you need to know about the applicability of GST on commercial rental income. The implementation of Goods and Services Tax (GST) has resulted in a structured approach to collect taxes from various sectors. Rent has been an important source of Income for many and the focus here is on the issue of rent from commercial property and the GST implications of the same.

Moving from the Service Tax regime to the GST regime
Prior to July 2018, the landlord had to obtain a service tax registration if his total taxable rental income from all properties exceeded Rs. 10 lakh per year. In other words, the landlord would be exempt from service tax if his rental income was less than Rs.10 lakhs. In the previous regime, only rental income from commercial properties was subjected to service tax. This also applied to residential property used for commercial purposes. Service tax was charged at the rate of 15% of the rent for commercial properties. 
Under the GST Act, renting or leasing out of immovable property would be treated as a supply of services. GST would be applicable only in the following conditions.

When a property is given out on lease, rent, easement, or licensed to occupy

When any property is leased out (or let out) including a commercial, industrial, or residential property for business (either partly or wholly)

Such renting is considered as a supply of services and thus would attract tax.

In other words, if a residential property was either used or let out for commercial purposes then it would be classified as a service provided and attract GST. Only property let out for residential purposes will be exempt from the GST ambit.

The new rules pertaining to the GST applicability on commercial rent

GST will be applicable when the rental income from commercial leasing is beyond Rs.20 lakhs. When you rent out a residential property for residential purpose, it is exempt from GST. Any other type of lease or renting out of immovable property for business would attract GST at 18%, as it would be treated as a supply of service. This includes leasing out commercial and residential property for commercial purposes, either fully or partially. After GST was implemented, the threshold limit for GST has been increased to Rs.20 lakh from Rs.10 lakh. This helps many landlords to stay out of the GST ambit.

Three key points to remember about GST on commercial rent

The GST applicability is not decided by the nature of the property but by the purpose for which it is used. If you live in Delhi and have a property in Chennai that is rented out to a listed company for use as guest house, then such a transaction will be leviable to GST if the rental income exceeds Rs.20 lakhs per annum. Here the use of the house is as a guest house, which is a commercial usage.

What will be the place of supply in the above case? Under GST, the place of supply shall be the location of the immovable property. Even though you may reside in Delhi, the place of supply will always be where the property is situated, which is Chennai and hence the state to receive the SGST will be Tamil Nadu.

If the rental flow is less than Rs. 20 lakh a year, thus it is exempted from payment of GST. To reiterate, it is not the nature of the property but the nature of the end use that will determine whether it is a commercial rent or residential rent.

Is the GST paid on rent claimable for the purpose of input tax credit (ITC)?
The person paying GST on rent can take credit for this tax paid against the GST that he is required to pay. In a nutshell, if all the provisions to claim Input tax credit are fulfilled, ITC on GST paid on rent can be claimed. Let us also look at the provisions pertaining to TDS on rent on commercial property. The owner of the leased property has to collect the GST from the person paying rent. This GST will be on the rent charged as per the rental contract. The payer of rent has to deduct income tax at source (TDS) at 10% if the rent for the property exceeds Rs.1.80 lakh per year. Failure to do so will attract penal provisions of the law and it may include monetary penalties including imprisonment.

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