GST on Residential House Properties Turned into Hostels

In a recent judgement, the Karnataka High Court has ruled that residential premises turned into a hostel for students and working professionals won’t attract Goods & Services Tax (GST).

Whether it Falls in the Scope of Supply under the GST law

As per the notification issued by the Central Board of Indirect Taxes and Customs (CBIC), a residential dwelling that is being rented as a hostel to the students and working professionals fall within the purview of a residential dwelling. Since the residential dwelling is purely being used for residence, it doesn’t fall in the scope of supply under GST law.

GST Treatment and Exemptions Available

It’s clear from the CBIC Notification No. 9/2017-Integrated Tax (Rate) dated 28th June 2017 that service provided by a taxpayer of renting out residential premises as a hostel to students and working professionals falls under Entry 13 of the notification and therefore eligible for exemption.

Input Tax Credit Availability

The notification exempts the levy of GST on such residential dwellings that are turned into hostels for students and working professionals. However, the input GST discharged by owners of such residential property on availing various inputs and input services for the upkeep of the said premises would not be allowed for Input Tax Credit (ITC).

References to Advance Rulings

The petitioner “Taghar Vasudeva Ambrish” is the legal owner of a residential property, which was partitioned among five owners (“the Lessors”), with each of them being the absolute owner of a respective floor of the said building. The Lessors jointly entered into a lease agreement with M/S. D Twelve Spaces Private Limited (“the Lessee”). As per the agreement, the Lessors leased out their respective portions of the said building to the Lessee for sub-lease as a hostel. The said hostel would provide long-term accommodation to students and working professionals for a duration ranging from three months to a year, in return for an agreed monthly rent.

As per exemption notification, the Central Government has exempted GST payments in respect of such services, including renting services provided for residential dwelling for use as a residence.

Appellate Authority for Advance Ruling (AAAR) Karnataka upheld the order passed by the AAR, Karnataka, that the petitioner isn’t entitled to the exemption from GST under Entry 13 of the Notification No.9/2017 – Integrated Tax (Rate) on renting of residential dwelling for use as a residence. The AAAR believed that the property being rented out by the said petitioner as a hostel was similar to sociable accommodation rather than a residential accommodation.

Further, the AAAR held that the exemption from GST is available only if a residential dwelling is used for residence by the person who has taken the said property on rent/lease.

The Hon’ble Karnataka High Court, in the case of Taghar Vasudeva Ambrish v. Appellate Authority for Advance Ruling (AAAR) Karnataka, quashed the order issued by the AAAR denying exemption from GST to the assessee for renting of property used as a hostel for students and working women. The court held that the residential dwelling was rented as a hostel to students. Working women fall within the ambit of residential dwelling as used by the students and the working women for residence. The court held that the notification doesn’t require the lessee to use the premises as a residence. Hence, the benefit of the exemption notification can’t be denied to the assessee because the lessee doesn’t use the premise.

The court held that such service would fall within the purview of a residential dwelling used for residential purposes. Hence, residential premises turned into a hostel for students, and working professionals won’t attract Goods & Services Tax (GST).