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

Impact of GST on rental income from Commercial Property

You may be pondering the question of whether you should be charging and collecting GST or the Goods and Services Tax on any rent income that is received by you. It is important to know about this and how it affects certain implications for taxation. The way that GST is treated depends largely on whether the property in question is a residence or a commercial property. Hence, the GST for each will be enacted differently. However, if you operate a business, the GST on rent is an expense that you may have to incur.

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 (the GST on rental income for that regime). 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 main thing to understand about GST on commercial property is the levy of the tax due to the rental income being attained as a supply of a service (renting out for office space, for example).

 

The new rules pertaining to the GST applicability on commercial rent

If you are still wondering who should register for GST when a property is rented out to a business, then look no further. An individual who is a taxpayer, and earning above the exempted limit, has to mandatorily register under the umbrella of GST and carry out the payment of taxes. Hence, if you have rented out your own property to any business concern, then that rent is taxable under GST for commercial property. The fact that you earn any income from business, and this includes rent, makes you fully eligible to register your name under the GST sphere. 

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. Here, you are not renting out your property for any service purposes but only for residential use. Hence, there is no GST on residential property for residential usage. 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.

An Illustrative Example

Let's explain some concepts relating to the GST on rent of residential property vis a vis commercial property. An individual named Rakesh resides in Chennai and has a property in Bengaluru. The property in Bengaluru is rented to a company called XYZ Corp. However, this property is used by XYZ Corp. as a guest house. For this property (in Bengaluru), Rakesh is getting an income from rent to the tune of Rs. 30,000. This is paid out to him per month. This works out to Rs. 3,60,000 per year. With regard to GST or the Goods and Services Tax, the place related to the supply of service will be the location of the property that is immovable. 

 

Hence, although Rakesh resides in Chennai, the place where the service is supplied is where he is renting it out to the XYZ Corp. In this case, the place is Bengaluru. In this example, the total rental income per year is less than the stipulated Rs. 20 lakh, so Rakesh need not pay any GST for this. Something to take note of is that although a guest house is used for the residence of individuals, it is being let out to a company for its use, and hence comes under the banner of a commercial rent. If the rental income had exceeded the limit of Rs. 20 lakh per year, then Rakesh would have to pay GST on 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.

Finally, something to note is that the rent which is charged on properties that are immovable will fall under a Reverse Charge Mechanism. This is when the government charges GST to a registered individual. In the case of an unregistered person, the government itself deducts the adequate GST. 

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