Lessor has to pay GST on rent if property is used for commercial purposes

Mumbai, Jan 18, 2024

The Rajasthan bench of the Authority for Advance Rulings has held that GST (Goods and Services Tax) is applicable on the rent if a residential property is used for commercial purpose by a lessee (who is registered for GST purposes).

In the case of Deepak Jain (the applicant) who had leased out his property to a private limited company, which was engaged in back-office operations, the AAR observed that, up to July 17, 2022, renting of residential dwellings for use as a residence was exempt from GST, while renting for commercial use was taxable at 18%.

However, from July 18, 2022, the taxability of renting residential property underwent certain changes and services by way of renting of residential dwelling used as a residence is taxable under the reverse charge mechanism, if rented to a registered person.

In this case, the lease deed issued by the Jaipur Development Authority stipulated that the land use of the property is residential. However, the lease agreement entered into by Jain and the private company stipulated that the property would be used solely for commercial use. According to the AAR despite potential classification as residential by local authorities, the predominant commercial use becomes the determining factor for GST levy.

Renting for commercial use is taxable at 18% and the applicant will have to pay GST on forward charge basis.

Responding to the specific questions on which the advance ruling was sought the AAR held that the premises will not be covered in the definition of a residential dwelling, under the notification dated July 13, 2022, due to its commercial use. Further, the use and length of stay by the users determine the nature of the property.

[The Times of India]