The new GST regulations, which went into effect on July 18, provide that a renter who is registered for the GST must pay Goods and Services Tax at a rate of 18% when renting a residential property. Only renters who are registered under the GST are subject to the 18% tax on rent. Previously, only commercial real estate, such as offices or retail premises that were rented or leased, drew GST. GST was not applied to business rent or personal leases of residential properties.
A GST-registered renter will now be required to pay the tax through the reverse charge mechanism, per the new regulations (RCM). The GST paid under Input Tax Credit is deductible by the renter. Registered people are defined as both natural persons and legal organisations under the GST law. When a person engaged in business or profession generates more than the threshold amount in yearly revenue, they are required to register for GST.
The GST law’s cap varies depending on the type and location of the supply. The upper limit for registered individual providing services alone in a fiscal year is 20 lakh. The cap is 40 lakh rupees for a seller of just commodities. The threshold limit is 10 lakh each financial year, nevertheless, if the registered firm is situated in one of the northeastern states or those that fall under a special category.
Impact of the New Rental Tax on Housing
Due to the decisions increased tax burden on companies who lease out residential buildings to be utilised as guest homes and lodging for their employees, the rental real estate market may be hampered in India.
The value of the property would be in the region of Rs 5 crore to Rs 6 crore if someone paid a monthly rent of Rs 1 lakh. The renter would suffer financial hardship due to the GST, which will cost about Rs 18,000, and subsequently so will the property owner since the tenant could want to lower the rent. In light of the possibility of a negative impact on their rental revenue, fewer people would likely volunteer their homes for renting. As a result, investors may be less inclined to fund initiatives for luxury homes.
According to experts, the action will have a significant negative impact on the government’s declared policy of promoting rental housing in India. On the one hand, it will make corporations pay more and comply with regulations. On the other hand, it can also cause the government to lose money.
Companies would rather rent the property in the names of their workers, who would not be GST-registered, than have their names on the rent contract in order to avoid paying the GST.
The country’s co-living market would suffer as a result of the decision to introduce an 18% GST. The majority of co-living companies rent out resident houses to students from private proprietors. Since they often have GST registrations, the introduction of an 18% GST will reduce their already meagre profit margins.
Be aware that those who earn a salary neither need to neither register for the GST nor pay the 18% tax on the rent they pay to landlords.
Tax on Rental Income in the Pre-GST era
In the pre-GST era, the landlord was required to register for service tax if the entire value of their taxable services, which includes rental revenue from all properties, exceeded Rs. 10 lakh annually. The landlord won’t be subject to service tax as long as the total annual rental revenue (from all rented properties) does not exceed Rs. 10 lakh.
Commercial premises alone that were rented out were subject to service tax under the former tax system. Even if a home property is utilised for business reasons, this still holds true. For commercial premises, a service tax of 15% of the rent was charged. Additionally, there was no service tax applied to the rental revenue from residential homes.
Simplification of GST on Rent
To Simplify GST on Rent we are dividing it in Three categories
1) Any Property to be used for Commercial purpose
2) Any property to be used for Residential Purpose
3) Specified Exempt Rent Income
1. Any Property to be used for Commercial Purpose
Using any property for commercial purposes (Forward Charge) Any registered person who rents out property for business purposes will be considered to have made a taxable supply, and any rent received in exchange for such a rental will be subject to taxation on a forward charge basis. The GST rate is 18% if the registered individual is also a regular tax payer. (Tenant is eligible for ITC if he is also a registered tax person.) If the registered person is a composition tax payer, the GST rate will be 6% (GST is here handled as composition-heavy; the threshold limit for service providers is 50,000,000 rupees). If the tenant is also a registered tax person, the ITC is not accessible to him.
2. Any Property to be used for Residential Purpose
An immovable property’s rental would be regarded as a supply of services under the GST Act. However, only some forms of rent will be subject to GST.When a piece of property is made available for lease, rent, an easement, or a permit to inhabit
When a commercial, industrial, or residential property is leased out (or let out) for a commercial purpose (either partly or wholly)
This kind of rental would be subject to tax since it is regarded as a provision of services. A residential rental is free from GST if it is used for residential purposes. Any other sort of lease or renting out of real estate for commercial purposes would be subject to GST at 18% since it would be regarded as a service provision.
3. Exempt Rent Income as Defined
Indicated by Central Tax Rate Notification 12/2017 A religious trust or a registered charity trust is free from GST if they receive rent in the following circumstances:
- There is a daily room rent cap of Rs. 1000.
- A benevolent trust like this charges no more than Rs 10,000 in daily rent for its stores, commercial spaces, and community centres.
- There is a daily rental fee of Rs. 10,000 or less for community halls or open spaces.
Who Will Be Affected?
The new changes, implemented after the 47th meeting of the GST Council, will impact the companies and professionals who have taken residential properties on rent or lease. The rent paid by companies towards the housing properties taken on rent to be used as guest houses or residences for employees will now attract 18 per cent GST. This will increase the employees’ costs for the companies that are offering free accommodation to employees.