Reverse Charge Mechanism on rental building

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Akash Siby (Querist)
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06 June 2024 Doing bussiness of taking building on rental basis and providing hostel facilities for third parties,
For RCM applicability use of building or type of building, which is considered?
Please mention any case laws available

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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06 June 2024 Renting a residential property for residential purposes to a registered person now falls under the Reverse Charge Mechanism (RCM) for GST payment.

Akash Siby

Akash Siby (Querist)
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06 June 2024 Hi,
How can we identify building nature? Is there any building documents to identify the same
if I take a commercial building for residential purpose, does it attract RCM.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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06 June 2024 Municipal tax payment identify residential or commercial building.

Akash Siby

Akash Siby (Querist)
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11 June 2024 Hi sir,
Thanks for the information.
Can you share your view on treating hostel rent as exempted under GST referring to the case law Thai Mookambikaa Ladies Hostel Vs. Union of India W.P.No.28486 of 2023 Dt. 22.03.2024

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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22 July 2025 Your inquiry pertains to the applicability of the Reverse Charge Mechanism (RCM) under the Goods and Services Tax (GST) regime concerning the rental of buildings, particularly when used for hostel accommodations. Additionally, you're interested in understanding how to classify a building's nature and whether municipal tax payments can aid in this determination.

🏢 RCM Applicability on Rental of Buildings
Under the GST framework, the Reverse Charge Mechanism is applicable in specific scenarios. For rental services, the critical consideration is the nature of the property and its intended use.

Residential Property: Renting out residential properties is generally exempt from GST, provided the accommodation is used for residential purposes. This exemption is outlined in Entry No. 12 of Notification No. 12/2017-Central Tax (Rate).

Commercial Property: Renting out commercial properties is subject to forward charge GST, meaning the landlord charges GST on the rent, and the tenant pays it.

However, when a commercial property is rented for residential purposes, the exemption may still apply, provided the usage aligns with the definition of a "residential dwelling."

🏠 Determining the Nature of a Building
To ascertain whether a building is classified as residential or commercial, consider the following:

Municipal Tax Records: Local municipal authorities often classify properties as residential or commercial for tax purposes. Reviewing these records can provide insights into the property's classification.

Building Plans and Approvals: The original building plans and any subsequent approvals or modifications can indicate the intended use of the building.

Usage Patterns: The actual use of the property, such as whether it's being utilized for residential purposes (e.g., hosting students or working women), plays a crucial role in classification.

Licensing and Regulatory Approvals: In some jurisdictions, operating a hostel requires specific licenses or adherence to regulations that distinguish residential accommodations from commercial establishments.

⚖️ Case Law: Thai Mookambikaa Ladies Hostel vs. Union of India
A pertinent case in this context is the Thai Mookambikaa Ladies Hostel vs. Union of India (W.P.No.28486 of 2023), where the Madras High Court ruled that:

"Renting out the hostel rooms to the girl students and working women by the petitioners is exclusively for residential purposes... the said services are covered under Entry Nos.12 and 14 of Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017, the petitioners are entitled to be exempted from levy of GST."

This judgment underscores that the intended use of the property (residential accommodation) is paramount in determining GST applicability, rather than the property's classification as residential or commercial.

🧾 Municipal Tax Payments and Property Classification
Municipal tax payments can offer some insights into a property's classification:

Residential Tax Rates: If the property is taxed under residential rates, it suggests the property is designated for residential use.

Commercial Tax Rates: Conversely, commercial tax rates indicate a commercial designation.

However, while municipal classifications are informative, they are not definitive. The actual usage of the property and adherence to relevant regulations are decisive factors.

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