Lessor is liable to pay GST on forward charge basis when the residential property is rented out for commercial purpose

The Rajasthan Authority for Advance Ruling (AAR) has determined that a lessor must pay Goods and Services Tax (GST) on a forward charge basis when a residential property is rented out for commercial purposes. Even though the property's land use is designated as residential, its actual use for commercial activities means it's not considered a residential dwelling for GST purposes. The supply of service for commercial use is taxable at 18%.

The AAR, Rajasthan in the case of In Re: M/s. Deepak Jain [Advance Ruling No. RAJ/AAR/2023-24/14 dated November 29, 2023] held that the Lessor is liable to pay GST on forward charge basis when the residential property is rented out for commercial purpose. 

Facts

M/s. Deepak Jain ("the Applicant") is a practicing Chartered Accountant. However, the Applicant is not a registered person under GST Act. The Applicant, along with other family members is the owner of the premises situated in Jaipur ("the Premises"). The Applicant entered into a lease agreement with Back Office IT Solution Pvt. Ltd. ("the Lessee") and is registered under the GST Act. As per the lease deed issued by the Jaipur Development Authority ("the Authority"), the land use of the premises is residential in nature. However, as per the lease agreement, the Premises shall be used for commercial purposes only. 

Issue

Whether the Applicant being Lessor is liable to pay GST on forward charge basis when the residential property is rented out for commercial purpose?

Held

The AAR, Rajasthan in Advance Ruling No. RAJ/AAR/2023-24/14 heldas under:

• Observed that, the central question of law in context with the aforementioned facts, is whether, the Premises would be covered within the definition of residential dwelling for the purpose of Notification No. 05/2022-Central Tax (Rate) dated July 13, 2022("the Notification")
• Noted that, though the Premises nature has not been changed by the Authority, the Premises would not be considered as residential in nature, as it is being used for commercial purposes. 
• Further Noted that, the supply of service i.e. renting for commercial use is covered under SAC 997212 and is taxable at the rate of 18 percent. 
• Opined that, the Lessor is supposed to pay GST at the aforementioned rate on forward charge basis. The Applicant is not required to pay GST under Reverse Charge Mechanism as per the terms of the Notification. 
• Ruled that, the Premises would not come within the purview of residential dwelling as per Notification.
• Further Ruled that, the important factor to be taken into consideration in determining the nature of Premises being residential or not is the purpose of for which the premises is being put to use and the length of stay of intended users.