Hostels and PG accommodation services attract @ 12% GST

The Karnataka Authority for Advance Rulings (AAR) has ruled that services provided by hostels and paying guest (PG) accommodations are subject to a 12% Goods and Services Tax (GST). The AAR determined that these services do not qualify as 'residential dwellings' and are therefore not eligible for the GST exemption typically applied to residential accommodation. This ruling also clarifies that additional services offered, such as meals, are taxable, and that registered accommodation providers must pay GST under the reverse charge mechanism on rent paid to landlords.

The AAR, Karnataka, in the case of Srisai Luxurious Stay LLP [Ruling No. KAR ADRG 25/2023 dated JULY 13, 2023] ruled that hostel and PG accommodation cannot be considered equivalent to residential accommodation and thus such services are not eligible for exemption and accordingly are exigible to GST @12%.

Facts

M/s. Srisai Luxurious Stay LLP ("the Applicant") was engaged in the business of developing, running, subletting, and managing paying guest accommodation, service apartments, flats and is also providing additional services like meals, furnished rooms, security, housekeeping, washing machine facilities, television in each room, internet access, and vehicle parking to the paying guests.

The Applicant was of the view that since private hostel are covered under the category of residential dwelling and thus such services are covered under exemption entry No. 12 of Notification No. 12/2017 Central Tax (Rate) dated June 28, 2017 ("the Service Exemption Notification") which inter alia coves ‘services by way of renting of residential dwelling for use as residence except where the residential dwelling is rented to a registered person’.

Issues

• Whether PG/Hostel used as residential dwelling by inhabitants qualify for GST exemption?
• Whether charges towards allied services would be considered as an ancillary services of hostel/paying services?
• Whether GST on reverse charge will be applicable on the rental to be paid to the landowners?

Held

The AAR, Karnataka [Ruling No. KAR ADRG 25/2023 dated JULY 13, 2023] held as under:

• With respect to the exemption of services, the AAR observed that neither the service exemption notification nor the Central Goods and Services Tax Act, 2017 and rules made thereunder defines the term ‘residential dwelling’. However, it was observed that education guide on taxation services interprets ‘residential dwelling’ based on normal trade parlance to mean a residential accommodation intended for permanent stay, excluding guest houses or lodges excluding places meant for temporary stay.
• Held that, the accommodation services provided by the Applicant are akin to guest house and lodging services, and thus does not qualify as ‘residential dwellings’ and accordingly, not eligible for exemption under Sl. No. 12 of the service exemption notification.
• Regarding additional services offered by the Applicant the AAR observed that, services such as meals and other facilities are optional and not integral to the main accommodation service.
• Held that, the Applicant is liable to pay GST on such services.
• In regard to payment of tax under RCM the authority firstly observed that, the Applicant has taken the building on rent from the owner of the building (landlord) and carry out business from such building.
• Stated that a new entry 5AA has been inserted vide notification no. 05/2022- Central Tax (Rate) dated July 18, 2022, in the principal notification no. 13/2017- Central Tax (Rate) dated June 28, 2017 which states that registered recipient would be liable to pay GST under RCM for ‘service by way of renting of residential dwelling to a registered person’.
• Held that, the Applicant who is a registered person is liable to pay GST under RCM on the rental payment made to landlord of the residential property.

Our comments

The similar ruling was passed by the AAR, Uttar Pradesh in the case of M/s V S Institute & Hostel Private Limited[AR No. UP ADRG -26/2023 dated May 08, 2023]. Although the ruling pronounced by both the AAR are only binding on the Applicants and the officers pronouncing the ruling. However, this would certainly impact the hostel industry more particularly in the area of education hub viz. Kota in Rajasthan. Taxing the hostel/PG would increase the cost for student and challenges for accommodation provider to maintain margins and occupancy.