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Renting of residential dwelling - withdrawal of exemption - a fiasco?

AUGUST 13, 2022

By CA Aumkar Surendra Prachi Gadgil, MCom, FCA

IN the 47th GST Council meeting held on 29th June 2022, inter alia , the following recommendation was made -

C4. In case of Services, following exemptions are being rationalized:

 

 

Sr. no. Description
2.

Exemption on following services is being withdrawn.

a. x xx

b. x xx

c. x xx

d. x xx

e. x xx

f. Renting of residential dwelling to business entities (registered persons).

For effectuating the above proposal, amendments were made in notification 12/2017-CTR [granting exemption] and in notification 13/2017-CTR [reverse charge liability] by notifications 04/2022-CTR and 05/2022-CTR respectively. Both these notifications are dated 13th July 2022 and made effective from 18th July 2022.

The relevant entries of these respective notifications read -

12 Heading 9963 or Heading 9972 Services by way of renting of residential dwelling for use as residence [except where the residential dwelling is rented to a registered person]. Nil Nil

 

5AA Service by way of renting of residential dwelling to a registered person. Any person Any registered person.

Instead of entering into a complex word jargon, the sum and substance of these amendments is lucidly explained in the tabulation below -

Sr No Residential dwelling let out for - Registration status of Owner of House property Registration status of Tenant of house property GST applicability and Person liable to pay GST
1 Residential usage Not registered under GST Not registered under GST No GST payable - exempted as per notification 4/2022 CTR
2 Residential usage Not registered under GST Registered under GST Taxable. Recipient to pay GST under reverse charge mechanism. Sr.5AA of 5/2022-CTR applies.
3 Residential usage Registered under GST Not Registered under GST No GST payable - exempted as per notification 4/2022 CTR
4 Residential usage Registered under GST Registered under GST Taxable. Recipient to pay GST under reverse charge mechanism. Sr.5AA of 5/2022-CTR applies.
5 For commercial usage Registered under GST Not registered under GST Taxable. Property owner would be required to pay GST under forward charge mechanism.
6 For commercial usage Registered under GST Registered under GST Taxable. Recipient to pay GST under reverse charge. Sr.5AA of 5/2022-CTR applies.

Some pertinent questions arise in the above context, which I have tried to answer below.

1. What about the Input tax credit, if tax is being paid under reverse charge mechanism?

If the renting is for residential dwelling, then the input tax credit would be blocked under provisions of section 17(5) of the CGST Act 2017. However, if the residential dwelling is taken on rent for commercial usage, then Input tax credit would be available as the residential dwelling would constitute a ‘place of business'.

2. What should the taxpayer do in order to ensure compliance under the GST laws?

The recipient (registered person)needs to start paying GST under reverse charge mechanism. Since the notification is effective from 18/07/2022, GST would be due on rent accruing from such date.

One nagging question is - whether the ‘registered person' should hold registration in the state/UT where such residential property is located?

As per Section 2(94) of the Act, 2017, ‘registered person' means a person who is registered under section 25.

The notification(s)does not qualify the word "registered". Therefore, if any recipient holds a registration under GST Laws anywhere in India and has taken a ‘residential dwelling' on rent, then the recipient would be required to pay GST under reverse charge basis, in that state where such ‘residential dwelling' is located. For this purpose, a fresh registration in that State would be required. This is because as per provisions of section 12(3) of the IGST Act 2017, the ‘Place of supply' in case of services in relation to immovable property will be the ‘location of such immovable property'.

Let us also take a look at the following examples:

Illustration no. 1.

X Ltd holds a Maharashtra GST registration. Itplans a new set up in the state of ‘Goa' and for this purpose sends a team to do the ground work. X Ltd has taken two flats of the same owner [unregistered] on rent for use as residence by their team members. The total yearly rent for the flats is Rs 18 Lakhs. X Ltd is of the view that since it does not hold a registration in ‘Goa' they shall be considered as ‘not registered under GST' and consequently no tax is required to be paid under reverse charge mechanism. Is this claim correct?

Answer.

This claim of X Ltd. is incorrect. Entry 5AA refers to ‘any registered person' as recipient. This qualification of being registered is not vis-à-vis registered in Goa but anywhere in India under the GST laws. Therefore, X Ltd. would be required to pay GST under reverse charge mechanism by seeking a fresh registration in Goa for purpose of discharging tax. This is apparently so because there is also 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.

Illustration no. 2.

The recipient of ‘renting of a residential dwelling for use as a residence' is a proprietor of a business and holds a GST registration based on his PAN. What is his tax liability?

Answer. The proprietor would be taking an unfortunate ‘hit' of the tax liable to be paid under reverse charge mechanism. He would also not be entitled to claim the Input tax credit in view of the provisions of s.17(5) of the Act.

Stop Press: The PIB in a tweet release yesterday evening said this -

Conclusion: It would be prudent on the part of the CBIC to clarify on both these aspects before the issue snowballs into a major controversy.

 

[The views expressed are strictly personal.]

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

 RECENT DISCUSSION(S) POST YOUR COMMENTS
   
 
Sub: residential property for use as residence

exmption entry was for renting service of residential property being used as residence and is made taxable under rcm with effect from 18 july if by provided to gst registerd person.
in other words even if use is residential the liability is there merely because the receiver is gst registered, the catcheble person
even after the amendment there is no change in the purpose of use. then why it is written in article that if used for commercial purpose then such such scenario. its leading to absured interpretation.
to my mind its intention to take tax and give credit also since receiver normally being the companies or coporates using it in the course and furthurance of business only. so far as the case of individual is concerned he will also get the credit if he can prove that he runs the business from there or its necessary for him to stay there to run the business or to grow the same

Posted by Navin Khandelwal
 

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