March 27, 2023

(This story originally appeared in on Jul 21, 2022)

MUMBAI: Relax, if you are a salaried individual and have taken a residential flat on rent/lease, the recently introduced norms for levy of goods and services tax (GST) under the reverse charge mechanism (RCM) on rent that is paid will not apply.

Up to July 17, GST was not applicable on rent/lease fee if the residential property was rented out to ‘any person’. Following the 47th GST Council recommendations and issue of a notification on July 13, residential property given out on lease or rent attracts GST under certain circumstances.

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The new norms stipulate that from July 18, when an ‘unregistered person’ (for example, a salaried individual or small businessperson) gives his/her flat on rent to a GST ‘registered person’ (for example, a company), then GST will apply. Further, under the reverse charge mechanism, it is the tenant who will have to bear the GST (current rate is 18%) and the compliance obligations. The term ‘person’ under tax laws denotes not just an individual, but is wide and includes all legal entities – including corporates.

Salaried individuals do not require a GST registration. It is also important to note that all businesspersons, professionals or business entities are not required to register. The annual threshold limit for registration is a turnover of Rs 20 lakh for service providers (say, a business consultant) and Rs 40 lakh for a supplier of goods (registration threshold limits are lower in northeastern states). However, in many cases, even those below the threshold limits obtain GST registration as it enables their clients/customers to claim input tax credit in the supply chain.

As social media is spilling over with anxious queries, let us examine three distinct scenarios:

Scenario 1

Here, a practising business consultant who is registered under GST has taken a flat on rent (from an unregistered individual) for himself and his family.Sunil Gabhawalla, founder of a CA firm, explains, “I would believe that the reverse charge mechanism would not be triggered if the rent paid is not claimed as an expenditure by this business consultant in his income tax return.”

Several anxious posts on social media have arisen because work-from-home has blurred the lines. “If a professional or gig worker is registered under GST and offers services as a sole proprietor, it may help nip any future controversy if he/she avoids taking the residential property on rent in his/her own name,” adds Gabhawalla.

Also, it should be remembered that if the tenant is not bound to register under GST, the reverse charge mechanism will not apply.

Scenario 2

A corporate entity has taken a residential flat on rent for its key employee or director. The landlord is a GST-unregistered individual.In this case, GST based on reverse charge mechanism will have to be paid by the corporate entity, which is the tenant. Gabhawalla adds that if the employee has instead obtained the flat on rent, even if he/she is compensated fully by the employer, there will be no GST implications on the rent paid.

Last, if both the flat owner and the tenant are unregistered parties, the new norms will not apply.

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