The Supreme Court of India, in a significant ruling for the real estate and student accommodation sector, has definitively held that the leasing of residential premises to an entity that subsequently uses it as a hostel for students and working professionals is exempt from GST.
The bench, comprising Justices JB Pardiwala and KV Viswanathan, upheld a prior verdict of the Karnataka High Court, rejecting the contention that such transactions should attract GST.
Legislative Intent Over Commercial Use
The core of the Supreme Court's reasoning centered on the ultimate use of the property and the legislative intent behind the GST exemption for residential dwellings.
"In the case at hand, the ultimate use of the property as a residence remains unchanged," the bench observed.
The court further noted the practical consequence of imposing GST:
- Levying an 18% GST on the transaction between the property owner and the lessee (such as M/s D Twelve Spaces Private Limited) would inevitably be passed on to the students and working professionals residing in the hostel.
- This would directly defeat the legislative intent of the government in granting the exemption for services related to residential use.
Overturning Advance Rulings
The ruling resolves a dispute that arose when a co-owner of a 42-room residential property in Bengaluru, who had leased it out to a company for use as a hostel, sought clarification on the GST exemption.
- The Authority of Advance Ruling (AAR), Karnataka, initially held that the renting was not covered under the relevant exemption entry.
- The Appellate Authority for Advance Ruling (AAAR) further denied the benefit, ruling that a property rented out as a "hostel" cannot be termed a residential accommodation or residential dwelling.
The subsequent Karnataka High Court judgment, now affirmed by the apex court, took a broader view, focusing on the dwelling's final purpose as accommodation for long-term stays (ranging from three to twelve months), irrespective of the intermediate entity managing the facility.
Key Takeaway
This Supreme Court decision provides much-needed clarity and relief to both property owners and operators in the co-living and student housing segments, ensuring that the cost of residential accommodation for students and working professionals remains lower by retaining the benefit of the GST exemption.
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