Latest Amendments in GST on Rent The GST law is said to be dynamic and the RCM on rent paid to unregistered persons was introduced in it as a way of broadening the tax base and ensuring compliance.
Circulars and Clarifications by GST Council The GST Council gives clarifications after some time through circulars to avoid any ambiguities in the law. For instance, clarifications have been made on how composite rent agreements should be treated and whether or not GST applies to lease rentals.
GST and RCM On Rent for Commercial and Residential Property The Goods and Services Tax (GST) has led to a momentous revolution of the tax system in India. GST is a blend of inclusive, consumption-based tax on supplies of goods and services crafted to amalgamate the multiple pre-GST indirect taxes. One important area, amongst various kinds of transactions entailing GST, relates to renting or leasing out property, particularly the reverse charge mechanism (RCM) on rent. Property managers, tenants and businesses will need to have a firm grasp of how they and the RCM apply to rent, in order to be compliant and avoid issues with the law.
Commercial Properties under GST Laws According to the law under the Goods and Service Tax Act, commercial properties are immovable properties that are given for lease for purposes of business or commerce. These may include office spaces, shops, warehouses among other similar kinds of properties where commercial activities are conducted.
GST on Commercial Property Rent Charges The rate of GST applicable on rental charges on commercial property is 18%. In other words, if you let out your commercial property then you have to levy 18% GST on the amount you receive as rent. For instance, if monthly rent amounts to Rs.1,00,000, the tenant will pay Rs 18,000 as GST making it add up to Rs 1,18,000 payable by the tenant altogether. Scenario Rent Amount (Rs.) GST Rate (%) GST Amount (Rs.) Total Payable (Rs.) Commercial Property Rent Rs.1,00,000 18% Rs.18,000 Rs.1,18,000 Commercial Property Rent Rs.50,000 18% Rs.9,000 Rs.59,000 Commercial Property Rent (Unregistered Landlord, RCM) Rs.80,000 18% Rs.14,400 (Paid by Tenant under RCM) Rs.94,400 (Total Cost for Tenant)
Commercial Property Rent Charges Table
Landlord’s registration requirements Every landlord earning more than Rs. 20 lakh (Rs. 10 lakh in case of special category states) annually on commercial property rentals should register under GST. Thus, upon registration, they shall be required to levy GST on the commercial property rent and deposit it with the government.
Input Tax Credit (ITC) for Commercial Rent It must be noted that tenants who rent out commercial properties for business purposes can claim input tax credit (ITC) on GST paid provided they are registered under GST. If this is done then, they will offset the tax liability on their output supplies by deducting the tax paid on rent thus minimizing their overall tax burden.
Examples and Case Studies For example, if a company rents an office space at a monthly rate of Rs 50,000, the payable goods and services taxes would sum up to Rs 9,000 (18% of Rs 50,000). In case such a tenant is registered under GST, subsequently he may claim a rebate of ITC Rs.9,000, reducing the net GST payable on their sales.
Residential Property under GST Laws Residential Properties According to GST law residential property means immovable property which is let out for staying purposes. As defined earlier, a residential house includes a bungalow or any other premises and garage thereto but does not include any other independent unit where the whole or part thereof is let out separately along with such premises.
GST Exemption for Residential Rent Residential rent is exempted from GST when one leases out the residential property for personal use. Consequently, if you are residing in a rented house or apartment, then no GST is levied and this implies that residential rent is supposed to be GST-free.
Impact of Renting Residential Property for Commercial Use However, if a residential property is rented out for commercial purposes this transaction will attract GST. For instance, if a house is leased by a business as a guesthouse or office space 18% GST shall apply. This table explains whether or not the components of RCM and GST apply to rental payments made for different types of properties and objectives.
Type of Property Purpose GST Applicability GST Rate RCM Applicability Commercial Property Business/Commercial Use Yes 18% Yes, if rented from an unregistered person Residential Property Personal Residential Use No N/A No Residential Property Commercial Use (e.g., guest house, office) Yes 18% Yes, if rented from an unregistered person
Application of RCM and GST components to rental payments
Understanding Reverse Charge Mechanism (RCM) Reverse Charge Mechanism (RCM) under the Goods and Services Tax Law comes into play when the recipient pays tax instead of the supplier. It applies in certain cases where tax compliance has to be ensured by the government like those transactions which involve unregistered suppliers.
RCM Applicability on Rent Rental Application RCM on rent under GST can be applied in some cases particularly when it is an unregistered landlord. For instance, if a non-taxable individual rents out commercial property to a tenant who is registered under GST, the tenant bears the responsibility of paying GST.
Under RCM, the recipient (tenant) must discharge the GST liability on the rent paid to the unregistered person. However, if such a tenant is carrying on the taxable activity he may claim ITC on the said tax amount paid under RCM rule.
RCM Commercial vs Residential Property RCM commercial rent under GST applies where there is a lease obtained from unregistered suppliers. On the other hand, residential properties have almost all been exempted from this tax unless they are used for business purposes. That’s why RCM works mainly within the commercial real estate market only, regarding rent payable to unregistered individuals.
Conclusion For anyone dealing in any residential or commercial properties it is good to understand the concepts of GST and RCM on rent. However, exemptions for residential properties and complications of the RCM make GST more complex than it needs to be. Because of these complexities in the GST laws, it is wise to seek rules from a tax professional to be compliant. A tax professional will be able to help navigate these rules and perhaps lower tax liability. Staying informed and aware of GST matters is crucial because it keeps a landlord and tenants compliant and allows them to take full advantage of the GST law.
FAQs 1. What does RCM on rent mean? RCM on rent means Reverse Charge Mechanism where a tenant (which receives services) has to pay GST instead of the landlord when renting a commercial property from an unregistered person.
2. Does GST apply to commercial property rental? Yes, 18% GST is applicable on rental payments made for commercial property by landlords who are registered under GST.
3. When does RCM apply on rent? RCM applies in case of rent paid to non-registered individuals for commercially rented premises by a tenant which necessitates payment of tax by him or her.
4. Can GST paid under RCM on rent be claimed as ITC by a tenant? Certainly, tenants can claim Input Tax Credit (ITC) on GST paid under Reverse Charge Mechanism (RCM) on rent, provided they are registered under GST and the rent is for business purposes.
5. How much GST applies to commercial property rent? The landlord charges an 18% GST rate on the whole amount of rent charged.
6. Do all commercial properties fall under RCM on commercial rent under GST? Only when the landlord is unregistered does it apply for RCM on commercial rent under GST. However, if he or she is not, the landlord charges and pays the tax.
7. What happens when payment of rent is made to an unregistered person? For instance, if a chain-store company pays its monthly rental fees to an unregistered individual, then such expenditure will be subject to goods and services tax in their return of output supplies as adjusted by such purchases and may also be entitled to claim ITC thereon.
8. Is residential rent applicable to RCM in case of GST? Residential Rent is simply exempted from this unless it carries with it some commercial element.
9. How do I file GSTR-2B and GSTR-3B for RCM on Rent under the GST Act? Inclusion of this transaction in his GSTR-2B or/and GSTR-3B forms that have been filed by him within the due date along with appropriate payment of Output tax would enable said tenant to make correct filing for this transaction.
10. Does the reverse charge mechanism apply to rents received by individuals from their tenants towards residential use? But not so for those hired out for living there; in any case, these particular properties are excluded from Goods and Services Tax revenue where a reverse charge applies respectively
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