18% GST applicable on renting of residential property to GST-registered entities, persons

[ecis2016.org] This rule, under which the tenant will be responsible for paying the GST, comes into effect from July 18, 2022.

In a move that would significantly change the dynamics of rental real estate in India, the Goods and Services Tax (GST) Council has decided to do away with the exemption so far granted to renting of residential units to businesses. Earlier, under Entry 12 of Notification 12/2017 of the Central Tax Rate dated June 28, 2017, ‘services by way of renting of residential dwelling for use as residence’ were exempt from paying GST, while leasing of residential units for commercial purposes attracted 18% GST.

In its 47th meeting, on July 13, 2022, the GST Council decided that GST will be applicable if a residential property is rented out to a person or entity registered under the new tax regime. The new rule, under which the tenant will be responsible for paying GST at 18%, comes into effect from July 18, 2022.

Note that a GST-registered tenant leasing a residential property from any landlord — GST-registered or otherwise — will be charged tax under the reverse charge mechanism after the change in rules.

Note that any service provider whose annual turnover exceeds Rs 20 lakh in a financial year is required to register under the GST regime. Similarly, goods-supplying businesses with an annual turnover exceeding Rs 40 lakh in a financial year have to register themselves as a normal taxable entity under the GST.

This move by the GST Council will increase the tax liability for companies that lease residential units to be used as accommodations and guest houses meant for their employees. This basically means that if a GST-registered entity rents a residential property for its employees for residential purposes, it has to pay 18% GST on the rent amount under the reverse charge mechanism and later claim ITC on the payment.

Move will impact rental real estate, says industry

The industry is of the opinion that this move will setback the growth of rental real estate in India.

“The decision by the government to implement the new GST rules will curb the rising demand for rental business across the real estate industry. In recent years, the rent has been an important source of income for many. Therefore, the current regime is going to impact the sentiments of home buyers. The government should soon intervene and provide a few measures that shall encourage the end-users to continue their investments,” said Sachin Chopda, managing director, Pushpam Group.

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“The introduction of 18% GST on residential rentals will have a major impact on the home buyers’ sentiments. The decision will also hamper the demand for rental real estate,” agreed Jitesh Lalwani, president, Homesync Real Estate Advisory.

“Rental businesses have become one of the major sources of income for people and with the new rule in GST, the residential rental market is expected to get impacted. Earlier, the GST was only levied on commercial properties that were open for rent. Now, the focus has shifted to the current soaring residential rental market, which might experience a little downside,” said Kaushal Agarwal, chairman, The Guardians Real Estate Advisory.