Impact of GST on Rentals from Immovable Property

Rental from Immovable Property in GST Regime

The advent of GST has got impact on most sectors in India and rentals obtained from immovable properties aren’t exception to the new taxation either.  In India, the whole idea of giving rent for residential or commercial purpose is too common.  In the GST regime, the issue of ‘renting of immovable property’ is addressed in schedule II.  The whole notion of taxation under GST for rentals from immovable properties is tricky. The schedule categorically includes two situations. If the whole purpose of opting for rent is residential in nature, there will be exemption for the user. Otherwise, if it is used with commercial viewpoint, 18% tax is applicable on the rental with reference to GST.

Interstate or intrastate supply? The dilemma

In the service sector, whether a supply is interstate or interstate is indeed a tricky proposition in the GST era. The GST regime clearly categories Central tax and State tax, which is very different from the VAT regime where only Central tax prevailed. The whole idea of bifurcating interstate supply or intrastate supply isn’t an easy task.

To tackle the impending crisis, two co-ordinates are to be established to clarify the dilemma – Place of supply of service and location of supplier of services. On the basis of these two parameters, it would be much easier to segregate interstate or intrastate supply in the GST era, subsequently finding a plausible way in determining Central tax and State tax.  These two co-ordinates are responsible for the impact of rentals from immovable property and clearly enables in segregating supply of services.

Consider an example of a landowner who is located in Delhi and owns an immovable commercial property in Mumbai. The question is whether the land owner will have to take GST registration in Maharashtra or Delhi. Let us consider the two above mentioned co-ordinates.

Place of Supply

Section 12(3) of IGST Act defines the place of supply of service with regard to an immovable property in a transparent way. It clearly states that location at which the immovable property is located. Is the place of supply.  For our current discussion, place of supply is Mumbai.

Location of supplier

Section 2(15) of IGST Act contains four clauses which are directly related to this and these clauses are pivotal in determining location of the supplier of service.

As far as Clause (a) is concerned, location of a supplier determines a place of business from where the supply is made. For the present case, it needs to be seen whether the land owner has any business in Mumbai or any immovable property within the city. Section 2(85) of CGST Act addresses the definition of ‘place of business’ in a methodical approach where it clearly states it to be a location from where a business is carried on or a warehouse is there for storage of goods or bank accounts are there or location of the agent in the same location or geographical region. In this regard, let’s not forget that having an immovable property doesn’t necessarily fulfil the criteria of ‘place of business’.  Section 2(85) of CGST clearly underline this issue with thorough understanding.

For better understanding, let us consider that under clause (b), the land lord is having fixed establishment in Mumbai. Thus, by section 2(50) of CGST Act, wherein a fixed establishment is a place is characterized by a sufficient degree of permanence and suitable structure in terms of human and technical resource, is not qualified as having an immovable property isn’t enough. In another example, consider clause (c) of section 2(15) of IGST Act which considers to a supply of service from more than one establishment and thus has no application in present example. Thus the present case falls under the residual clause (d) which remains true in absence or not-applicability of a,b and  c clauses.

Conclusion

Hence it is understood that the location of the landlord as well as the place of supply are importing determinants in the tax applicable. If the landlord lives in Delhi and the place of supply is in Mumbai, as per provisions of section 7 of IGST, the interstate supply to IGST will be applicable as the locations are in different states. In this particular scenario, the landlord won’t need to take GST registration in Maharashtra.