An important update for all of us as the government has now implemented changes to the residential rental property taxation. Starting from 18th July 2022 the dynamics of renting residential property has undergone a major change. The decision to change the taxation system on residential rental property in India was taken in the 47th GST Council Meeting. Let’s understand the latest news of paying 18% GST on residential rental property in India.
Applicability of GST on Residential Rental Property
Before the 17th July, 2022 the GST was not applicable on residential rental property. It means GST on residential rental property was under the GST Exempted Category.
GST applicable on Residential rental property starting 18th July 2022
As per the CGST(Rate) Notification no. 04/2022 dated 13.07.2022. & CGST(Rate) Notification no. 05/2022 dated 13.07.2022, the GST exemption on residential rental property is withdrawn.
Therefore, now the liability of paying tax will arise under reverse charge mechanism and the tenant will now pay GST at the rate of 18%.
Important Note: Persons not having GST Registration will not be liable to pay GST on Residential Rental Property.
Effect on Residential Property Landlord (If the tenant has a GST registration)
- If the supplier (landlord/lessor) is registered for GST, it will be indicated that they are outbound supplies subject to the reverse charge mechanism. There is no additional GST duty because the renter or leased, who is the beneficiary, is responsible for paying GST. Section 17(2) states that since the outbound supply is subject to Reverse Charge Mechanism taxation, there is no issue with taking advantage of the input tax credit.
- If the vendor (landlord/lessor) doesn’t have a GST registration. There is no new GST burden or GST compliance because the recipient (tenant/lessee) is responsible for paying GST.
Impact of GST on Residential Rental Property for different type of taxpayers having GST Registration
For normal taxpayers under GST
It will be regarded as a business expense when a company, LLP, firm, AOP, BOI, etc. rents a residential property for the purpose of housing staff. GST will be paid using reverse charge mechanism (RCM). The taxpayers can here claim Input Tax Credit through GST Return Filing.
For Composition Taxpayers
A residential property that is rented for habitational purposes by a composition dealer who is GST-registered will be regarded as an item of business expense. GST will be paid via RCM, however as per section 10(4), a composition dealer will not be able to claim input tax credit.
For Proprietorship Firms
It will be regarded as a personal expense and not a proprietorship firm’s business expense when an individual who is registered under the GST as a proprietorship concern rents a residential property for himself or herself or family members. GST will be paid by reverse charge mechanism. However, here also taxpayers can not claim Input Tax Credit as it is blocked per section 17(1).
GST applicability on Residential Rental Property for Commercial Purposes
When a registered person rents a residential property for business purposes, it will be considered similar to a commercial unit. GST cannot be assessed against or paid by either the landlord or the renter if the landlord is not registered. If the landlord is registered, the recipient may claim an ITC and GST will be imposed on a forward charge basis.
Must Note for GST on residential rental property in India
- ITC is not granted if the taxpayer utilized it for personal residence purposes while registered as a proprietorship business. However, if the owner rents it to one of its workers, it would be seen as an expansion of business and would qualify for the RCM tax credit.
- Input Tax Credit will depend on a number of factors. For example, Depending on the rental agreement, how the property is really used, the kind of taxpayer, etc, a registered taxpayer may or may not be able to claim the credit for taxes paid under reverse charge.
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