Residential Dwelling – A comparative analysis

POSITION PRIOR TO JULY 18, 2022 – Prior to July 18, 2022, “services by way of renting of residential dwelling for use as residence” were exempt from the levy of GST. [Please refer to Entry No. 12 of Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017]. In simple words, exemption was available for services of renting, if the following conditions were satisfied:

1. Renting must be of residential dwelling;
2. Residential dwelling must be used for the residential purposes

Registration status of the supplier of services and/or recipient of services was not pertinent for the purpose of availing the benefit of the aforesaid exemption notification.

It is relevant to mention here that said exemption was not available where renting of residential dwelling was for a purpose other than residence. Further, the liability of charging and depositing applicable GST was in the hands of the service provider (i.e., the landlord) under the forward charge provided the landlord was a registered person and renting of residential dwelling is for the purpose other than residence.

No GST was being levied where the landlord was unregistered person (as landlord was outside the threshold limit of mandatory registration under GST) despite such renting was for a purpose other than residence and service recipient was a registered person.

Taxability of renting of residential dwelling prior to July 18, can be understood by way of below matrix:

POSITION EFFECTIVE FROM JULY 18, 2022

W.e.f. July 18, 2022, Entry No. 12 of the Notification (supra) has been amended vide Notification No. 04/2022 Central Tax (Rate) dated July 13, 2022. The amended entry reads as “Services by way of renting of residential dwelling for use as residence except where the residential dwelling is rented to a registered person.

On a bare perusal of the amended entry, it can be seen that exemption stands withdrawn where the residential dwelling is rented out to a person registered under the GST. Consequently, the end use of residential dwelling seems not relevant and GST shall be levied where such residential dwelling is rented out to a registered person.

In furtherance to the said amendment, the burden of depositing GST has been shifted from forward to reverse charge mechanism. Accordingly, Notification No. 13/2017-Central Tax (Rate) dated June 28, 2017 prescribing services on which GST is payable under reverse charge has also been amended effective from July 18, 2022 vide Notification No. 05/2022-Central Tax (Rate) dated July 13, 2022. The inserted entry has been produced hereunder for the sake of clarity:

Taxability of renting of residential dwelling effective from July 18, can be understood by way of below matrix

Our Comments

After these amendments, registered person, be it individual or a company or a firm is liable to pay GST under RCM despite such residential dwelling is used as a residence. The registered persons, who are entitled to claim such rentals as a business expenses (e.g. the corporates use residential dwellings for their employees / directors and they are entitled to consider rentals paid as business expense) would be entitled to avail input tax credit of GST paid (under the reverse charge mechanism) whilst taking a view that such expenses are in furtherance of business.

The registered persons, who have been using residential dwelling for use as residence and not claiming such rentals as business expenses would not be entitled for input tax credit of GST paid (under reverse charge mechanism), since, it is not in furtherance of business.

In our view, the Government intended to levy tax on such residential dwelling, which are given to corporates (registered person), however, no GST was being levied since such residential dwelling are used for the residential purposes.

These amendments have created discrimination amongst various scenarios, for instances renting of residential dwelling by a registered person to an un-registered person for use as residence is not leviable to GST, however, on the other hand when such services are provided to registered person (be it individual not claiming such rentals as business expense), who is using for residence purposes, is liable to pay GST under reverse charge mechanism.

Under these circumstances, we are of the view that the Department should issue necessary clarification regarding leviability of tax under RCM when such services are used by those registered persons, who are not claiming such rentals as business expenses.

In other words, reverse charge should be applicable only for those registered persons who are entitled to claim such rentals as business expenses and eligible to avail input tax credit of GST paid under reverse charge mechanism, otherwise, it would be an additional burden on the tenants (individual registered persons), who enter into rent agreement / lease deeds with the landlords for using residential dwelling as residence and do not claim such rentals as business expense.

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