Arjun (Fictional Character): Krishna, what is the new dispute on rent under GST?
Krishna(Fictional Character): Arjuna, the new dispute is whether notional interest on the security deposit paid by the tenant, should be taken into consideration for the purposes of arriving at the total value from rental, or not. The AAR of M/s. Midcon Polymers Pvt. Ltd. is regarding the same issue, where the advance ruling states that GST shall be leviable in such a case only if it influences the value of rent. Now how to know its influence is the real issues for the Owner and tenant. Let us discuss the same in detail.
Arjun (Fictional Character): Krishna, is GST leviable on rental services?
Krishna(Fictional Character): Arjuna, according to the GST act, renting of an immovable property would be treated as a supply of services. However, GST will be leviable @18% when either aim movable property is given out on lease, rent, easement, or licensed to occupy; or any property is leased out, including a commercial, industrial, or residential property for business. For e.g. Rent of Office, Shops, Factory, etc. Thus, renting of residential property for residence will not attract GST. For e.g. Flat given for residence attracts no GST, but the same given for Office will attract GST.
Arjun (Fictional Character): Krishna, what is the way of computing the value of rent?
Krishna(Fictional Character): Arjuna, according to section 15(1) of the CGST Act 2017, with regard to the value of the supply, stipulates as under:
"The value of supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration of the supply". Further section 15(2) of CGST Act 2017, the value of supply of services shall include any taxes, duties, cesses, fees, and charges levied under any law for the time being in force other than The GST Act, 2017 subject to the condition that they are charged separately by the supplier. Thus, the rent charged by the owner to the tenant is taxable value and which further includes property taxes, municipal taxes, etc. For e.g "A" has rented an office for Monthly rent of Rs.10,000 and taken a deposit of Rs. 5,00,000 from "B". "A" shall pay GST on Rs.1,20,000 Per Ann according to the plain reading of current GST Law.
Arjun (Fictional Character): Krishna, what will be the treatment of security deposit under GST?
Krishna(Fictional Character): Arjuna, the security deposit shall not be considered as payment made for the supply of rental services, unless the supplier applies such deposit as consideration for the said supply. For example, if the security deposit is taken as a guarantee against damage to property, is an interest-free refundable deposit which will be returned to the lessee at the expiration of the lease period, and hence shall not be considered as consideration for the supply of rental service. However, at the expiry of the lease tenure, if the entire deposit or part of it is withheld and not paid back, as a charge against rent, etc., then at that stage such amounts not refunded will be liable to GST. As per the above e.g., "A" has taken Rs. 5,00,000 deposit, which will not be part of the value of rent.
Arjun (Fictional Character): Krishna, what is the issue discussed in AAR of notional interest on the deposit and its taxability under Rent?
Krishna(Fictional Character): Arjuna, as per AAR, the notional interest earned on the security deposit has to be considered as part of the value of supply of service if the said notional interest influences the value of supply i.e. value of rental service and is leviable to GST along with monthly rent at 18% i.e. at the rate applicable to the monthly rent. The stand taken is "Higher the deposit lowers the rent and visa-versa" by the AAR. It further states that "Thus, it notional interest to be considered as part of Consideration u/s 2(31) (b), being Monetary Value of any act…. In the instant case, the national interest that the applicant earns is in respect of the supply of Rental service, though is not by the recipient of the service but from another person."
For e.g. as per the above case, "A" has to calculate the notional interest of Rs. 60,000/- i.e, @Bank rate say 12% on Rs. 5,00,000 for a year and include it in the value of Rent, i.e, Rs, 1,20,000 Per Ann. Thus, the total taxable value comes to Rs. 1,80,000/- and GST is levied on it. This is the issue of AAR now giving trouble to the Owner and Tenant both in the future.
Arjun (Fictional Character): Krishna, what should the taxpayer learn from this?
Krishna(Fictional Character): Arjuna, the security deposit is taken invariably in all cases and it is a general practice that wherever the quantum of the deposit is higher the Rent charged is less and vice-versa. The security deposit is collected when the property is leased. If the property is not leased, a security deposit is not collected. Thus, there is a nexus between the security deposit taken and the rent charged beyond doubt as per AAR.So now, irrespective of the amount of security deposit, be it Rs. 100,000/- or Rs. 1,00,00,000; notional interest may be calculated, and GST may be charged on it by the Tax officers. Taxpayers don’t seem to be happy with this decision of levying GST on the notional interest on the security deposit, as they are not actually earning interest on the deposit amount and how to know the factor of influence on the value of rent as per each rental contract is the real question. This is going to be a big point of debate in GST for Owner and Tenants. So careful reading and implementation of AAR are a must in many cases. The large scale applicability of such AAR’s is always a question of law.
Disclaimer: This Karneeti tax update is only for the purpose of information and does not constitute or purport to be advice or opinion in any manner. The information provided is not intended to create an advisor-client relationship and is not for advertising or soliciting. The author does not intend in any manner to solicit work through this Tax update article. The articles are only to share information based on recent developments and regulatory changes. The author is not responsible for any error or mistake or omission in this article or for any action taken or not taken based on the contents of this article. Business decisions are best taken in close consultation with the advisors.