AUGUST 01, 2022

By Surbhi Premi, Director and  Vaishali Aggarwal, Senior Associate, Lakshmikumaran & Sridharan

KARNATAKA High Court in the matter of Taghar Vasudeva Ambrish ¹ provided the muchneeded clarity on the aspect of exemption on the 'services by way of renting of residential dwelling for use as residence' to a registered business entity. It loudly apprises the fact that Entry 13 contained in the Exemption Notification ² is unambiguous and is clear and the benefit of Exemption Notification cannot be denied to the petitioner on the ground that the lessee is not using the premises by itself. It has also put an end to the ground taken by the department that exemption is available only if the residential dwelling is used as a residence by the person who has taken the same on rent / lease.Also, registration status and activity undertaken is irrelevant for the purposes of determining the eligibility under the Exemption Notification as long as residential dwelling is being used for purpose of residence.

Hence, the nature of contracting parties or the occupation of the occupant or status of lessee has no relevance to decide exclusion from above exemption entry.

However, the above position is being overturned by Notification No. 04/2022-Central Tax (Rate) with effect from 18th July 2022, which inter-alia provides that above exemption would not be available where the residential dwelling is rented to a registered person.

Accordingly, renting of residential dwelling for use as residence to a registered person is taxable from 18th July 2022. Government, in order to provide relief to supplier, has shifted the tax burden to the registered recipient by bringing such services under the ambit of reverse charge vide Notification No. 05/2022-Central Tax (Rate) .Meaning thereby that the tax shall be discharged by the registered person under reverse charge in scenarios where services of renting of residential dwelling is supplied by any person to any registered person.

Though the government has provided the relief to supplier, whether registered or unregistered, but it has turned a blind eye to the hurdles which is to be faced by the recipient while complying with this provision, apart from his liability to pay tax under reverse charge.

In this article, we intend to highlight those issues so that the taxpayers can make informed decisions before discharging their tax liability under reverse charge.

1. Availability of ITC - Employees and Expats

Usually as a business practice, companies obtain residential properties on lease for offering residential accommodation to their employees or clients or its foreign delegates.

For evaluating the eligibility of ITC on inward supply of renting service by the company, firstly, the taxability of services provided by company to its employees or expats need to be analyzed.

Facility of providing residential dwelling to employees would be in terms of 'employment' if the same is covered under the terms of employment agreement and will not be subject to GST. Circular No. 172/04/2022-GST is encapsulating the same principle. Herein, availability of ITC is litigative as such service might fall under the category of personal consumption by employees.

In respect of expats or foreign delegates who are not employees of the company, such persons are unregistered person under the GST law, hence, rendition of such service would be exempt considering Sl. No. 12 of the Exemption Notification. In these scenarios, ITC would not be available. However, the secondment contracts need to be analysed to see whether provision of accommodation is a condition of contract, so as to avail ITC. However, even in this case, the hurdle or restriction on ITC on the basis of personal consumption has to be crossed.

2. Taxability in case of Place of supply in a different state

Let's imagine a scenario in which a company, registered only in Haryana, obtains a residential property in another state, say, Delhi for its employees or for its foreign delegates and such company is unregistered in GST in the state of Delhi.

Considering the provisions of place of supply regarding the immovable property, company would be required to pay CGST and corresponding Delhi GST under reverse charge. It needs reiteration that the company is registered only in Haryana.

The Government has not contemplated such a situation and accordingly, there is no mechanism under the GST law or GSTN portal which enables a person registered in one state to deposit the tax of another state under reverse charge.

Considering this, whether it can be concluded that there is no requirement to pay tax in such scenarios or whether government would introduce a mechanism on GSTN portal to deposit such amount. The clarity is awaited in this regard.

A further issue might arise that whether the company would be required to obtain the mandatory registration in such state under Section 24 ³ of the CGST Act for discharging tax pertaining to such state. If this practice is accepted by industry, then whether such company is required to obtain registration in every state wherein it has obtained residential property on rent. Further, next issue which arises is whether a person, other than an actual recipient, can discharge the tax liability of another person as registrations of a legal entity in different states is considered as distinct persons in the eyes of GST law.

3. Cross charge requirement for guest houses between different registrations of the same entity

It may be noted that the exemption for guest houses for value upto Rs.1000 has been removed from 18th July 2022. Therefore, the taxability of guest houses has to be examined when a guesthouse, say, under Maharashtra registration is used for accommodation by the employees of Delhi registration. As discussed in earlier paragraphs, the tax might have to be paid by Delhi registration under reverse charge, but the nature of tax is CGST+SGST of Maharashtra, however, there is no such mechanism to pay local taxes of different states by a registered person. Further, if we consider that tax is payable, this payment will become a cost in the hands of the legal entity since this pertains to a different state.

4. RCM Applicability on property used for Commercial use

Amended RCM Notification ⁴ mentions that the 'service by way of renting of residential dwelling to a registered person' falls under RCM and tax will be paid by registered recipient when such services are provided by any person to any registered person. Herein, irrespective of the status of supplier i.e., whether registered or unregistered, tax will be discharged by the registered recipient.

However, the aforesaid entry does not mention the words "for use as residence" as specifically mentioned in Exemption Notification. So, whether it can be said that renting of residential property for commercial use would also be covered under reverse charge mechanism.

Another school of thought could be that residential dwelling would only include properties which are used for residential use.

5. Taxability of Advances

Companies would be required to pay GST under reverse charge with effect from 18th July 2022 on procurement of residential property on lease for offering accommodation to their employees or clients or its foreign delegates. However, what would be fate of transactions on which payment has been made in advance prior to 18th July 2022 for the rent duration falling after 18th July 2022.

Herein, supplier would not have raised the tax invoice as prior to 18th July 2022, it was an exempt supply. So, in case of registered supplier, bill of supply would have been issued, otherwise in case of unregistered supplier, a commercial document would have been issued. There might be a possibility that no document was issued in such cases since the suppliers might be unregistered individuals supplying an exempt service.

Now, if the time of supply for such transaction arises prior to 18th July 2022, then such services would fall under the category of exempt service and no GST would be applicable. In those cases where the time of supply falls after 18th July 2022, then in such cases, it would be taxable. Further, the application of Section 14 ⁵ of the CGST Act, which takes out the payments received prior to the rate change from the GST purview, may pose issues specially for the reason that it requires the issuance of invoice prior to change in rate i.e., 18thth July 2022, which is not required as per the provisions of the law in any of the scenarios discussed above.

It seems that the amendment to the renting of residential dwelling entry is posing certain unintended and unforeseen hurdles and, therefore, it would be in the interest of the Trade if the CBIC comes out with a clarification quickly.

[The views expressed are strictly personal.]

¹ 2022-TIOL-242-HC-KAR-GST

² Notification No. 12/2017- Central Tax (Rate)

³ Compulsory registration in certain cases.

⁴ Notification No. 13/2017 – Central Tax (Rate)

⁵ Change in rate of tax in respect of supply of goods or services