OCTOBER 03, 2017

By K Srinivasan, IRS

SERVICES by way of renting of Immovable dwelling place for use as residence was a clear-cut exclusion under the Negative List regime and duly covered by the mega exemption Notification under the old Service tax law.

The same dispensation is believed to have been carried forward to the GST regime as well with effect from 1/7/2017. This is covered by mega exemption Notification No. 12/2017 Central Tax (Rate) Dt. 28/6/2017(Entry Sl.No.12 HDNG 9963-Accommodation or 9972- Real estate, refers).

However, there is widespread speculation afoot that if corporates/commercial establishments provide residential accommodation to their staff or visitors instead of putting them up in Lodges/Guesthouses/Hotels and also Hostels providing accommodation to Students/working women and men, whether it would attract GST?

A Lodge/Guesthouse/Inn/Clubhouses and so on are, after all, different genres of accommodation which are hired for relatively shorter periods of stay for a few days as a transit accommodation.

The service of renting of Immovable property for stay by Hotels/Inns etc. are charged to GST based on the daily tariffs of those establishments such as Below Rs 1,000/- per day NIL tax,Above Rs 1,000/- and upto Rs 2,500/- per day,12% Tax, Above Rs 2,500/- and upto Rs7,500/- per day, 18% Tax and Above Rs 7,500/- per day,28% Tax.

Compared to the above types of accommodation, a house or apartment is hired out on a monthly rent for a longer duration, generally governed by a Residential Rental Lease agreement between a Lessor who owns the Immovable property or is in legal possession of it and the Lessee to whom it is rented or leased out for the stated residential purpose.

It is pertinent to note that the by-laws of many housing societies clearly mandate against renting out apartments for commercial use while some do permit the same.

Similarly, Hostels/Lodges are hired out for inmates for longer periods of stay under rental agreements comparable to use as residence.

Those who do not prohibit ensure that those properties suffer commercial rents, rates and taxes including maintenance charges as contrasted to regular residential occupants.

The Law rightly recognizes them as commercial accommodation liable to tax though for stay, due to the very nature of running of the establishments which is akin to a service Apartment.

Here, the nature of activity of the person providing the said service matters more and is kept in focus than the service per se albeit in some degree it resembles residential stay which is also the case of Hotels/Inns/Guesthouses and so on.

Coming back to long term residential accommodation provided, though by a commercial establishment, say by Hostels/Lodges, there seems to be a signal difference between the former and the latter, in that the former lacks an element of relative permanence while the latter has the characteristic of permanence of stay.

If one looks into the practical aspects, there are Lodges which offer stay only on a monthly basis but not less than a minimum period of 3/6/12 months. In such cases, it is not expected of anyone to reduce the monthly rent to daily rent and compare it with the rate tariffs provided under the GST Notification for Hotel/Lodge stay.

The daily Rent based Tax rates prescribed under GST is amply indicative of the nature of levy linked to day rents and one can easily infer from the above that the tariff does not envisage reducing monthly rentals to daily rates artificially for rate comparison to fix taxability of such service charged on monthly basis that too for residential purpose.

Similar engagement in exercises of reducing monthly rent to daily rates for Apartments leased out by Corporates for their stay and Hostels rented out to inmates for stay on a relatively long period would sound absurd.

In the above cases, the inmates staying there can afford to even furnish their address of stay to the Local/ civic/Transport/Bank authorities for obtaining domicile certificate/driving license/opening of bank account/obtaining Credit cards/Cell phone Sim cards and so on.

Let us now turn to Companies renting out a house for stay for its employees, either while travelling or while staying put for a while. In either case, the owner of a residential dwelling enters into a rental Agreement for letting out his house or Apartment for residential purpose of the Company staff/visitors and not for transacting business.

The fact of the matter is that in all the above cases there will be a rental agreement firmly in place between the Lessor and the Lessee which does not allow it to be charged to GST in terms of the mega exemption Notification cited above.

Further, the commercial test to be applied to ascertain whether a place is used for residence or Commerce is to rely upon the parameters adopted by the Local Body/Electricity Board for charging of the amenities to local taxes.

The assessment to house tax/water tax/Electricity, all have two different tariffs. One is known as residential while the other is Commercial which is much higher compared to residential.

Hostels run by Colleges recognized by UGC are meant for accommodation of Students. Other Organizations such as YMCA/YWCA/Youth Hostel etc. including Hostels run by Private Individuals are meant for accommodation of Students as well as working women and Men.

The inmates in all the above cases are charged a monthly rent for residing in their Hostels. It is generally for a longer duration of stay, for say, at least a year or two to coincide with the tenure of the Courses or tenure of transfer in case of employed personnel. In all these cases, the hostels can be either their own or even rented out and in turn sub-let to the residents.

The point that is relevant for taxation here would be incidentally the fact of being rented out on a longer duration for use as residence and not the ownership of the property whether it is directly owned by the Lessor or whether it is leased out from somebody else who owns it for sub-leasing it in turn to the lessee-resident in the end. (Notification No. 12/2017 Central Tax (Rate) Dt. 28/6/2017 Entry Sl.No.12 HDNG 9972- Real estate- Further appears to have a bearing on the renting of the residential accommodation which the notification seeks to exempt)

The point of reference here is, therefore, whether or not the place is put to use as residence. If it is for use as residence, then the said renting of Immovable property service is out of tax net, is the broad understanding of everybody

Whereas there is widespread doubt in the minds of many including those running Private Hostels for housing students/working women and men on long periods of stay whether their activity of renting out the accommodation to the inmates would attract GST.

Under the Old Law, there were no doubts and none of the Hostels were assessed to service Tax. It will be highly worthwhile for the Government to quickly demystify this doubt lingering in the minds of the stake holders to the effect whether or not the above residential accommodation provided by Individuals and business on long term basis would attract GST especially when housing is a an avowed guarantee for all citizens in the 2017 Budget Speech of the Hon'ble FM?

(The author is Assistant Commissioner, GST, Chennai and the views expressed are strictly personal.)