In India, the government implemented the Goods and Services Tax (GST) to create a unified tax framework that would improve openness and accountability. This GST had a significant impact on the real estate industry, including construction, sale, purchase, lease, and rent, to name a few.
Using the Real Estate Regulation and Development Act (RERA) as an example, standardization, greater governance, and disclosure procedures have all been established in the real estate sector. GST concessions have also been extended to dwellings built for a variety of groups, including those who are economically weak or who live in slums.
In addition, numerous provisions were established for assessing GST on rental income, such as the definition of GST-taxable services, the location of supply, and GST exemption limitations for services, among others. In this article, we are going to discuss the impact of GST, which includes GST on residential rent as well as GST on commercial rent. What that means for Indian property investors, both residential and commercial, is unclear.
Also read: Impact of GST on Rental Income
Tax on Rent before GST implementation
Before the implementation of GST, property owners or landlords needed to register for service tax before renting their property out. However, this only applied if the total of the taxable services, including the revenue from rent on all of his properties, exceeded the basic exemption level of Rs. 10 lakhs per year.
Individuals with rental income exceeding Rs. 10 lakhs per year were required to register for service tax. As a result, everyone with a yearly rental income of less than Rs. 10 lakhs was excluded from registration under the service tax and was not required to pay tax.
Also read: The Quickest Guide to Passive Income Taxation in India
GST on rent
According to the GST Act, renting out an immovable property is classified as providing services, and hence the GST is applicable. The following are the conditions for the rental income to attract the Goods and Service Tax.
- The property must be given on rent, lease, easement, or licensed to occupy.
- Any property, including commercial, residential, or industrial, must be leased out for business purposes partly or wholly for the GST to be imposed.
The condition of exempting rental income from residential purposes stands the same. The threshold limit for GST application has been extended up to Rs. 20 Lakhs from Rs. 10 Lakhs earlier. This has helped the landlords fall in the range of Rs.10- 20 Lakhs who had paid the service tax in the pre-GST era.
The GST is charged at a new rate of 18% on the rental income exceeding Rs.20 Lakhs, earned through leasing or renting properties for business objectives.
It is a point to be noted that the threshold of Rs. 10 Lakhs remains intact in 11 special category states across India. Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh, and Uttarakhand.
Place of Supply of Services under GST
12(3) of the IGST legislation defines where services are supplied when they relate to moveable property. The site of supply would therefore be the location of the immovable property in cases like granting rights to use the immovable property. Let’s look at the rules for GST applicability on commercial and residential rental revenue with these notions in the background.
GST on Residential Property Rental Income
Because of this, residential homes rented out solely for habitational purposes are not subject to GST. As a result, under Central Tax (Rate) Notification No. 12/2017, services provided by renting a residential home for personal use are exempt from GST at the ‘Nil rate.’ The only exception to this rule is residential premises rented out for business purposes, which are subject to the Goods and Services Tax (GST).
GST on Commercial Property Rentals of Immovable Property
- GST is charged at 18% on all commercial properties that generate taxable income.
- If a registered charitable or religious trust owns a space meant for the public, it will not be categorized under the property that attracts GST under the specifications mentioned below.
- The rent of the rooms must be below Rs. 1000 per day.
- The rent of other business spaces like shops and stalls in the vicinity must be less than Rs.10,000 per month.
- The rent on larger spaces like community halls and open area spaces like gardens in the religious precincts must be less than Rs. 10,000 per day.
Also read: Wanna save tax on your rental investment? Here is everything you should know!
GST Application On Commercial Rent & Residential Rent
Service Tax on Residential Rent
Residential property rent collected on a rental basis for personal use was exempted from service tax under the provisions of the service tax statute. Rent received from the residential property given on a rent-to-own basis was not included in the definition of taxable services under the service tax.
As a result, even if an individual earned more than Rs. 10 lakhs in home rental income in a year, he was exempt from paying service tax. However, any residential property rented for commercial purposes was subject to service tax and hence taxable.
Service Tax on Commercial Rent
Rental income from commercial property was subject to service tax under the terms of the service tax statute. As a result, everybody with a yearly rental income from commercial premises that exceeds Rs. 10 lakhs was required to pay service tax. Rent from commercial premises was subject to a 15 percent service tax.
Also read: Latest GST Reforms in India for Homebuyers
When does GST become applicable to commercial leases?
In comparison to the previous indirect tax regime, the GST exemption limit has been enhanced for services. While the former indirect tax structure had an exemption limit of Rs. 10 lakhs, the GST now has one of Rs. 20 lakhs.
As a result, everyone with a commercial rental income of more than Rs. 20 lakhs per year must pay GST on it. As a result of the adoption of GST, many people who were previously subject to indirect tax have been exempted.
GST on commercial rent
An 18 percent GST is applied to the rental of any immovable property for commercial purposes. As a result, a GST of 18% is charged on the taxable value. If you own commercial property, your taxable value is the amount of rent you receive. The annual commercial rent must be greater than Rs. 20 lakhs, as previously mentioned. GST will not be applied to commercial rents under Rs. 20 lakhs per year.
As a side note, GST will not be charged on the rental of religious facilities owned and managed by a recognized charitable or religious Trust for the public. However, under the following circumstances, an exemption may not be available to you:
- The daily room rental is around Rs. 1000.
- The daily rental fee for properties, such as a community hall or open space, is at least Rs. 10,000.
- Business areas cost at least Rs 10,000 per day to rent.
How does GST get calculated for commercial property rentals?
All rented commercial spaces will be subject to GST at a rate of 18% on the taxable value, and rent will be recognized as a taxable supply of service.
GST does not apply to religious places owned and managed by a registered charitable trust or a religious trust for the benefit of the general public. So long as the following three requirements are met:
- Rooms are available for less than Rs 1000 per day
- Businesses pay less than Rs 10,000 per month
- Community halls and other open places cost less than Rs 10,000 per day
Also, read 8 legitimate methods to reduce tax on your passive income from real estate!
ITC on Rent
The person who pays GST on rent has the option of claiming an input tax credit, which he can then use for the GST he must pay. To put it another way, if a person qualifies for ITC, they can claim it for the GST they paid on their rent.
TDS on Lease
The owner of a piece of real estate that is rented out must collect GST from the renter. GST is levied by the owner of the property on the rent charged to the tenant. In addition, the individual paying the rent is obligated to deduct income tax at the source at a 10% rate. TDS, on the other hand, is imposed if the annual rented amount exceeds Rs. 1.80 lakhs. Moreover, TDS applies to both private and public properties alike. On top of that, there’s no GST to pay on TDS.
In light of GST, it’s difficult to see how a renter’s income will ever be able to exit the property. In comparison to other Indian tax systems, GST is a far more contemporary and well-structured revenue collection process. As nothing is perfect, measures are constantly being implemented to fix the tiniest of GST’s shortcomings.
To sum up, GST has destressed the customers with the simplified tax regime removing multiple complicated taxes. Now, the customers pay a single tax called Goods and Service Tax with the least confusion. The new tax regime has also exempted the GST on residential purposes of the rental property. The threshold limit has been extended up to Rs.20 Lakhs from Rs.10 Lakhs. This eased the stress of a significant sector of consumers from paying service tax in the pre-GST era, which has now been exempted, making it more affordable. Also, with the latest GST reforms, GST is favoring the homebuyers, click here to know more!
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