Impact of GST on Rent
The implementation of Goods and Services Tax (GST) has chalked out a structured approach to collect taxes from various sectors.
Rent has been the source of Income for many over the years. In this article, let us talk about the impact of the implementation of GST on rent, Let us also see if GST varies for commercial properties and residential properties.
What was the situation in the Pre-GST era?
Pre-GST, the landlord had to obtain a service tax registration if his total taxable services (including the rental income from all properties) exceeds Rs. 10 lakh per year. As long as the rental income (from all the properties that have been rented-out) does not exceed Rs 10 lakh per year, the landlord would not be attracted to service tax.
Under the previous tax regime, commercial properties alone, that were let-out, would attract service tax. This applies even if a residential property is used for commercial purposes. Service tax was levied at 15% of the rent, for commercial properties. To add, rental income from residential properties did not attract service tax
Will renting out a property attract GST now?
According to the GST Act, renting out of an immovable property would be treated as a supply of services. GST, however, will be applicable only to certain types of rent such as:
- 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)
Theis type of renting is considered as a supply of services and would thus attract tax.
What is the effect of GST on rent?
When you rent out a residential property for residential purposes, it is exempt from GST. 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.
After GST was implemented, the threshold limit for applicability of GST has been increased to Rs.20 lakh from Rs.10 lakh that was in the pre-GST era. This makes many landlords – who were earlier covered under the service tax regime to be at ease now up to another Rs.10 lakhs earned. (Please note that the threshold limit of Rs.20 lakh excludes special category states, where the limit remains at Rs.10 lakh.)
Let us look at an example:
Manish resides in Bangalore and has a property in Hyderabad that is rented out to B ltd. for use as a guest house. For the Hyderabad property, he is getting a rent of Rs. 30,000 monthly, or Rs. 3,60,000 per annum.
Under GST, the place of supply shall be the location of the immovable property. Therefore, even though the person resides in Bangalore, the place of supply will always be where the property is situated, which is Hyderabad in this example.
Here, the rental amount is lesser than Rs. 20 lakh a year, thus it is exempted. It needs to be noted that, though this property is used for residential purposes, it cannot be said that the rent that is received is that from the residential property as this property is given to a company for their use. How they use the said property is not the deciding factor.
Who is required to register when the property is rented to businesses?
A taxpayer earning more than the exempted threshold will have to register under GST and pay taxes. So, if you have given your property to a business, then it is taxable. If you are getting more than Rs 20 lakh as rent from the same, you will have to register yourself under GST.
How is GST calculated when you rent out a property for commercial purposes?
- For all commercial spaces that are on rent, GST will be applicable at 18% on the taxable value and rent would be treated as a taxable supply of service.
- If a registered charitable trust or a religious trust owns and manages a religious place meant for the public, it is exempt from GST. This can happen only if:
– The rent of these rooms is less than Rs. 1000 per day
– The rent of shops and other spaces for business is less than Rs 10,000 per month
– The rent of community halls or any open area is less than Rs 10,000 per day
What are the ITC provisions when GST is charged on rent?
The person paying GST on rent can usually take credit for the tax paid to pay his other tax dues. In other words, If all the provisions to claim Input tax credit are fulfilled, ITC on GST paid on rent can be claimed.
What is the provision for a tax deduction on income tax for the rented property?
The owner of the property (which is given on rent) has to collect the GST from the person paying rent. This GST will be on the rent charged. The payer of rent has to deduct income tax at source at 10% if the rent for the property exceeds Rs.2.40 lakh per year from the AY 20-21 onwards. The TDS is applicable both to residential and commercial properties. There will no GST on TDS.
Important Point to remember: GST on rent charged for immovable properties by the government or local authority to a registered person will be under Reverse Charge Mechanism. However, when the property is rented to an Unregistered person, the government would themselves deduct GST (Forward charge mechanism).