Ramneek Patel, an MNC executive in Gurugram is on a company leased accommodation and the HR is deducting INR 40,000 per month for his rented apartment. Now that the Goods & Service Tax (GST) has been imposed for rental residential units to companies, he has been told by the company that the said liability will be passed on to the employees living in company leased apartments. They can otherwise find an apartment on their own.
“I mean my house rent within the salary bracket is already in the highest slab to get an apartment in a costly city like Gurugram. Now that the additional amount of INR 7200 has been slapped on me I have nowhere to go but to accept it. This is like encouraging the tenants to deal in cash and save the skin. I hear a lot of noise in the power corridors that they wish to promote rental housing in India like other global cities. Is this the way to make rental housing feasible, questions an agitated Patel.
This tenant is not alone in having this additional burden of GST over rented accommodation. Till now GST was only applicable on buying the under-construction properties, including apartments, builder floors, villas and bungalows. However, GST was not applicable on the purchase of developable plots and for apartments ready for possession that have Occupancy Certificates (OCs).
“Is renting a house a service that I have availed? Isn’t it my basic need to have a roof over my head? I mean middle class tenants don’t take rented accommodation as a luxury service but out of compulsion to not afford buying it. It is a burden on average salaried middle class Indians who can’t afford to buy a house and now to afford a rented house too is a luxury,” argues Sunita Sharma, a tenant in Bangalore
How GST on residential rentals changed?
The July 13th, 2022 gazette of Central Tax Notification brought residential rentals under GST ambit from July 18th 2022. The previous notification of June 2017 order has been amended to bring residential dwelling rented to a registered person and companies with GST under 18% tax payment. The onus of paying tax lies on the lessee and not the lessor.
However, no individual, who is living in a rented flat and does not have a registered GST number, will have to pay 18% GST. But 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. If a builder providing rented accommodation to the tenants of redevelopment projects, whether or not he 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 see it falling under the taxable GST of 18%.
Possible impact of GST on rented apartments
Companies would avoid guest houses
Employees in new cities find employers’ reluctance in office leased accommodation
Rental returns falling below 2% on net gain
Rental housing to suffer
Cash dealings in rental market to increase
Second homes for rental returns to suffer
Industry cautious
The industry has reacted cautiously to this and many within the built environment of Indian real estate believe that this decision would adversely impact the expansion of rental real estate in India. Some nevertheless are welcoming the move with guarded optimism.
Aditya Kushwaha, CEO, Axis Ecorp points out the Goods and Services Tax (GST) Council has agreed to eliminate the exemption previously granted for rental residential units to companies. This decision will alter the dynamics of rental real estate in India. At its 47th meeting, held on July 13 2022, the GST Council determined that residential properties rented to a person or entity registered under the new tax regime will be subject to GST.
“The new rule, according to which the tenant is accountable for paying 18% of the GST, takes effect on July 18, 2022. 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 dealing 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 Goods and Services Tax (GST) has boosted transparency and efficiency in the real estate industry and decreased unethical practices. The recent changes are in line with the vision that the Government has in strengthening the GST regime. From a 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 Input Credit and thus there will be no change in their overall spending,” says Dungarwal.
Tax liability 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 & staff accommodation and the corporates can offset it with the ITC (Input Tax Credit). However, the closer look at the ITC adjustments indicates that the Section 17(5)(g) of The CGST Act 2017 does not allow the ITC of GST paid for any services for personal consumption.
In a nutshell, it has a multiple blow as it would discourage the companies to get rental accommodation, employees would prefer cash deals, second homes for rentals would suffer and the institutional investors would shy away from investment in rental housing.
Ravi Sinha
#RaviTrack2Media
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