The Original Exemption

A Focus on End-Use · Prior to 18 July 2022

From the inception of GST on 1st July 2017 until 17th July 2022, the governing provision was Entry No. 12 of Notification No. 12/2017-Central Tax (Rate). It exempted “services by way of renting of residential dwelling for use as residence”. The exemption was fundamentally activity-specific, hinging on two core conditions:

1. The property being rented had to be a ‘residential dwelling’.
2. The ultimate purpose of renting the property had to be for ‘use as residence’.

During this period, the registration status of the service provider (landlord) or the service recipient (tenant) was immaterial. As long as a residential property was used for residential purposes, the transaction remained outside the GST net. This broad scope led to interpretations where even commercial entities renting residential properties for their employees’ accommodation could avail of the exemption, provided the end-use was residential.

The Paradigm Shift

Amendment of 18 July 2022

A pivotal change occurred with effect from 18th July 2022, which fundamentally altered the nature of the exemption by introducing a recipient-based condition. The exemption entry was amended to read:

This amendment significantly narrowed the scope of the exemption, with the following key implications:

• Withdrawal of exemption for registered tenants: the exemption is no longer available if the tenant is a person registered under GST. This applies regardless of whether the registered tenant uses the property for their own residence or for commercial purposes.
• Introduction of the Reverse Charge Mechanism (RCM): concurrently, Entry 5AA was inserted into the RCM notification (No. 13/2017-CT(R)), stipulating that for services by way of renting a residential dwelling to a registered person, the liability to pay GST shifts to the recipient. The registered tenant is now responsible for paying the GST directly to the government on the rent paid to the landlord — a move intended to bring such transactions into the tax net, since many landlords are unregistered and would otherwise not be liable to collect and pay GST.

This change had a significant impact on businesses that rent residential properties for their employees, directors, or as guesthouses. These businesses, being registered entities, became liable to pay GST under RCM on such rentals.

A Necessary Clarification for Proprietors

Effective 1 January 2023

The amendment of July 2022 created ambiguity for proprietors of proprietorship concerns. A proprietor is a registered person under GST in their business capacity, but they also have a personal capacity. To address the question of whether GST under RCM would apply if a proprietor rents a house for their personal residence, an explanation was inserted with effect from 1st January 2023.

This explanation clarified that the exemption for renting a residential dwelling remains available if the following two cumulative conditions are met:

1. The registered person is a proprietor of a proprietorship concern and rents the residential dwelling in their personal capacity for use as their own residence.
2. The renting is on their own personal account, and not on account of the proprietorship concern.

This provided much-needed relief to individual business owners, ensuring that their personal rental transactions were not inadvertently brought under the tax net on account of their business’s GST registration.

The Decisive Amendment of 2024

Excluding Hostels and PGs · 15 July 2024

While the judiciary had in the past taken a view that long-term hostel accommodation could qualify as a ‘residential dwelling’ for residential use, a further amendment effective from 15th July 2024, via Notification No. 04/2024-CT(R), decisively settled this issue from a legislative standpoint. Two significant changes were made to Entry 12:

1. Insertion of Explanation 2: a new explanation was added, explicitly stating that the exemption for ‘renting of residential dwelling’ does not cover services such as:
   • Accommodation services for students in student residences.
   • Accommodation services provided by hostels, camps, paying guest (PG) accommodations, and the like.
2. Removal of Heading 9963: the scope of the entry, which previously covered services under Heading 9963 (accommodation, food and beverage services) and Heading 9972 (real estate services), was amended to remove Heading 9963.

These changes effectively mean that services provided by hostels, PGs, and co-living spaces can no longer claim exemption under the ‘renting of residential dwelling’ category. This legislative action supersedes previous judicial interpretations and brings clarity, albeit by making such services taxable. It is, however, important to note that a new threshold-based exemption has been introduced under a separate entry.

Summary of GST Implications

The current GST liability on the renting of a residential dwelling can be summarised as follows, reflecting the rules post the amendments:

Analysis of Practical Scenarios

To better understand the application of these rules, consider the following practical scenarios:

Conclusion

The GST exemption on the renting of residential dwellings has transformed from a simple, use-based exemption into a nuanced rule-set that depends critically on the tenant’s GST registration status and the specific nature of the accommodation. The amendments effective from 18th July 2022, which introduced the reverse charge mechanism for registered tenants, and the more recent changes from 15th July 2024, which explicitly excluded hostels and PG accommodations from this exemption, reflect a clear legislative intent to plug revenue leakages and bring greater clarity. Taxpayers — including landlords, tenants, and operators of accommodation services — must now carefully evaluate each rental transaction against these evolved parameters to ensure correct GST compliance.