The GST Council’s move, to levy 18% GST on residential rentals, is likely to hamper the rental market, rather than making it more transparent. We examine why
Ramneek Patel, an MNC executive in Gurgaon, lives in a company-leased accommodation, for which his employer deducts Rs 40,000 per month for the rented apartment. Now that the Goods and Services Tax (GST) has been imposed for rental residential units to companies, he has been told by the company that the said liability will have to be borne by the employees living in company-leased apartments, or they can otherwise find an apartment on their own.
“My house rent within the salary bracket is already in the highest slab, to get an apartment in a costly city like Gurugram. I now have to accept the additional amount of Rs 7,200 that has been slapped on me, as I have nowhere to go. This new rule will only encourage tenants to deal in cash. While the authorities maintain that they wish to promote rental housing in India, like other global cities, is this the way to make rental housing feasible?” asks an agitated Patel.
GST on rent for residential property: What has changed?
Until recently, GST was only applicable on buying under-construction properties, including apartments, builder floors, villas and bungalows. However, GST was not applicable on the purchase of developable plots and for ready apartments that have Occupancy Certificates (OCs). In its meeting on July 13, 2022, the GST Council decided to bring residential rentals under the GST’s ambit from July 18, 2022. The previous notification of June 2017 was amended, to bring residential dwellings rented to registered persons and companies within GST, under 18% tax payment. The onus of paying the tax lies on the lessee and not the lessor.
No individual, who is living in a rented flat and does not have a registered GST number, will have to pay 18% GST. However, if a company with a GST number is leasing to individuals, then, the tenant has to pay the GST. Further, the GST has to be paid by the lessee (occupant) to the credit of the government under the Reverse Charge Mechanism (RCM).
There are certain areas on which notification does not have any clarity. Whether or not a builder providing rented accommodation to the tenants of redevelopment projects, will have to pay the GST, remains unanswered. Similarly, an individual running a proprietorship company with a GST number might take a flat for personal use but the taxmen would view it as falling under the taxable GST of 18%.
Sunita Sharma, a tenant in Bangalore, who is unhappy with the rule argues: “Is renting a house a service? Isn’t it my basic need to have a roof over my head? Middle class tenants do not take rented accommodation as a luxury service but out of necessity, as they cannot not afford to buy the units. It (the new rule) is a burden on the salaried middle-class Indians who cannot afford to buy a house. Now, to afford a rented house too, is a luxury.”
18% GST on residential rent: Industry reacts cautiously
While many believe that this decision would adversely impact the expansion of rental real estate in India, the real estate industry has reacted cautiously to the announcement.
Aditya Kushwaha, CEO, Axis Ecorp, points out that the decision of the Goods and Services Tax (GST) Council, to eliminate the exemption previously granted for rental residential units to companies, will alter the dynamics of rental real estate in India. “The new rules provide home buyers with greater certainty regarding their tax liability than in the prior regime. With improved transparency arising from the GST effect on India’s real estate market, buyers would have more faith in the taxation of property transactions in India,” says Kushwaha.
Vinit Dungarwal, director, AMs Project Consultants, believes the new rules will have a positive impact on the industry. There is likely to be greater transparency and a reduction in unethical dealings in the real estate industry. As a result of the Input Tax Credit, the GST on real estate building costs is decreased when numerous taxes are combined. “The recent changes are in line with the vision that the government has, in strengthening the GST regime. For the residential rental market, not much is expected to change, as this new rule applies only to corporates. Most of the companies will be able to take ITC and thus, there will be no change in their overall spending,” explains Dungarwal.
GST on rent: Tax liability, a bone of contention
This action by the GST Council will increase the tax liability of businesses that lease residential units, for use as employee housing and guest residences. This essentially means that if a GST-registered firm rents a residential property for residential purposes to its employees, it must pay 18% GST on the rent amount using the Reverse Charge Mechanism and then claim ITC on the payment.
The general perception has been given by the government that 18% GST on rented accommodation would only hurt the companies that hire guest houses and staff accommodation and that the corporates can offset it with the ITC (Input Tax Credit). However, a closer look at the ITC adjustments, indicates that Section 17(5)(g) of the CGST Act 2017, does not allow for ITC of GST paid for any services for personal consumption.
In a nutshell, the new rule could well deal multiple blows, as it would discourage companies from getting rental accommodation, encourage employees to opt for cash deals, affect the purchase of second homes for rental income and institutional investors would shy away from investment in rental housing.