The Goods and Services Tax (GST) framework in India, governed by the Central Goods and Services Tax (CGST) Act, 2017, provides for exemptions on certain supplies of goods and services in the public interest. One of the most pertinent exemptions, which affects a vast number of individuals and businesses, is related to the renting of residential properties. Initially conceived as a straight forward exemption to make housing affordable, its application and interpretation have undergone significant legislative changes and clarifications over the years. This article delves into the evolution of this exemption, from its original form to the latest amendments, providing a detailed analysis of its implications for landlords, tenants, and businesses in the accommodation sector.
The Original Exemption: A Focus on End-Use (Prior to 18th 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 18th 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: "Services by way of renting of residential dwelling for use as a residence, except where the residential dwelling is rented to a registered person".
Introduction of 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. This means the registered tenant is now responsible for paying the GST directly to the government on the rent paid to the landlord. This move was intended to bring such transactions into the tax net, as 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 1st 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 due to their business's GST registration.
The Decisive Amendment of July 2024: Excluding Hostels and PGs
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), has 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, which explicitly states 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.
1. 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. However, it is important to note that a new threshold-based exemption has been introduced under a separate entry (Sl. No. 12A), which exempts long-term stays (90 days or more) in such accommodations where the monthly charges do not exceed ₹20,000 per person.
Summary of GST Implications on Renting a Residential Dwelling
The current GST liability on the renting of a residential dwelling can be summarized in the following table, reflecting the rules post the amendments:
GST GUIDE
Taxability of Renting Residential Property
The GST implications on residential property rentals depend on the tenant's registration status and the intended use of the property. The table below summarizes the applicable tax treatment and GST liability.
Tenant's Registration Status
End Use of Property by Tenant
Taxability
GST Payment Liability
Unregistered Person
For Residence
Exempt
Not Applicable
Unregistered Person
For Commercial Purposes
Taxable
Supplier (Landlord) under Forward Charge
Registered Person
For Residence or Commercial Use
Taxable
Recipient (Tenant) under Reverse Charge Mechanism (RCM)
Registered Person (Proprietor)
For Own Residence (in personal capacity)
Exempt
Not Applicable
Analysis of Practical Scenarios
To better understand the application of these rules, let's consider some practical scenarios;
Renting to Co-living/Space-Living Companies: When a property owner rents a residential dwelling to a co-living company (which is registered under GST), the company is liable to pay GST under RCM on the rent it pays to the owner. When this company, in turn, provides accommodation to students or professionals (who are typically unregistered), that subsequent supply may be exempt or taxable based on other specific notifications, such as the new threshold-based exemption for long-term stays. The co-living company would not be able to claim Input Tax Credit (ITC) for the GST paid under RCM if its output supply is exempt.
Mixed Use by a Registered Professional: If a registered professional, such as a Chartered Accountant, rents a residential dwelling and uses it partly for residence and partly for their professional office, the entire transaction becomes taxable. Since the tenant is a registered person, they would be liable to pay GST under RCM on the total rent amount. This is because the supply would be treated as a mixed supply, which attracts the tax treatment of the supply with the highest tax rate.
Renting to a Person Registered in Another State: If a residential dwelling in Delhi is rented to a person who is registered under GST in Uttar Pradesh but not in Delhi, GST under RCM would not be payable. The liability under RCM is tied to the registration status within the context of the specific supply's location.
Conclusion
The GST exemption on the renting of residential dwellings has transformed from a simple, use-based exemption to 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.
