GST On Rental Commercial / Residential Property Under RCM

Topics covered in this article :-

• GST on renting of Residential dwelling
• GST on residential rent under RCM (reverse charge mechanism)
• GST on renting of Commercial Property
• Summary
• Frequently asked question (FAQs)

In this article, we will discuss in detail how GST will be charged on renting a residential and commercial property. We shall discuss different scenarios where GST will not be charged and cases where GST will have to be paid under RCM (reverse charge mechanism)

Renting of Residential dwelling :

According to entry No. 12 of Notification No. 12/2017 dated 28.06.2017, the service provided by way of renting a residential dwelling is exempt.

So, if a residential property is rented for residential purposes, then it is exempt from GST.

Renting of Residential dwelling to Registered person / GST on residential rent under RCM :

According to Notification no. 04/2022- Central Tax (Rate) dated 13th July 2022, entry number 12 was amended where after “Services by way of renting of residential dwelling for use as a residence “except where the residential dwelling is rented to a registered “person” words were added.

If we understand this notification when a property is rented out for residential purpose, then it is exempted from GST, but when a property is rented out as a residential dwelling to a GST-registered person for residence purpose, then GST is leviable on it and according to Notification no. 05/2022 –Central Tax (Rate) dated 13th July 2022, this service will be taxable under RCM. The recipient of the service will have to pay GST under RCM.

Moreover, in the 48th GST Council meeting, this matter was clarified that if the residential dwelling is being used for personal purpose by the registered person and the rent paid is not claimed as business expenses then GST will not be paid under RCM.

It means that for a registered person who is the proprietor of a proprietorship firm and has taken a house on rent for his residential purpose, whose rent he is paying in his personal capacity, then GST will not be applicable on it.

Renting of Commercial Property :

Rental income of commercial nature falls under Entry No. 16 of Notification no. 11/2017 (Central Tax Rate) Dated 28th June 2017, in which GST is applicable at the rate of 18%, which has to be charged by the service provider (i.e. Landlord) under 'forward charge mechanism'.

But, if both landlord and tenant are unregistered, then in this case, GST will not be applicable.

What we have understood, let's understand with some examples: -
Example-1
Q : A bank is providing accommodation facilities for its employees. Where the bank pays rent directly to the landlord, will GST be applicable in this case?
A : If a residential dwelling is rented out to a GST-registered person for residence purpose, then GST will be leviable on it and the recipient of the service will have to pay GST under RCM.
In this case, the Bank is registered under GST and it is paying rent for its employee's accommodation, so in this case, the bank will have to pay GST in RCM.

Q : ‘Mr. B’ is registered in GST, he took commercial property on rent from an unregistered person. Will the applicability of RCM arise in this case?
A : In case of rental income of a commercial nature, GST has to be charged under 'forward charge'. If the landlord is unregistered, there is no provision that the registered person will have to pay GST in RCM.

Therefore, in this case, the applicability of RCM will not arise. Besides this, the landlord is not GST-registered. Therefore, no GST will be charged on this rent income.

Summary of above provisions:

S. No.	Nature of Property	Use of property	Landlord	Tenant	Taxability
1	Residential	Residential	unregistered	unregistered	No
2	Residential	Residential	unregistered	registered	18% under RCM
3	Residential	Residential	registered	unregistered	No
4	Residential	Commercial	unregistered	unregistered	No
5	Residential	Commercial	unregistered	registered	No
6	Residential	Commercial	registered	registered	18% under forward charge
7	Commercial	Commercial	unregistered	unregistered	No
8	Commercial	Commercial	unregistered	registered	No
9	Commercial	Commercial	registered	registered	18% under forward charge

Frequently asked question (FAQs)

Q : What is Reverse Charge Mechanism (RCM) under GST?
A : As per Section 9 of CGST, The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on a reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

It means, under RCM liability to pay GST has been shifted on the recipient of goods/ services.

Q : Is RCM applicable on rent paid to unregistered persons?
A : There may be below situation in this case :-

1. In case of commercial property taken on rent from unregistered person by a registered/ unregistered person :
   Furthermore, a landlord is unregistered, and hence, there will not be any GST under forward charge. If commercial property is taken on rent by a registered or unregistered person, in both cases, there is no GST under RCM.
2. In the case of residential property taken on rent from an unregistered person by a registered person:
   If the residential property is taken on rent by the registered person, then GST will be paid under RCM.
3. In case of residential property taken on rent from an unregistered person by a unregistered person:
   In this case, there is no applicability of RCM.

Q : When RCM is applicable in the case of commercial property?
A : In case of rental income of a commercial nature, GST has to be charged under 'forward charge' only. If the landlord is unregistered, there is no provision that the registered person will have to pay GST in RCM.

Q : Is residential property taken on rent is subject to RCM?</strong
A :If a residential dwelling is rented out to a GST-registered person for residence purposes, then GST is leviable on it and according to Notification no. 05/2022 –Central Tax (Rate) dated 13th July 2022, this service will be taxable under RCM. The recipient of the service will have to pay GST under RCM.

Q : What will be the rate of GST under RCM ?
A : GST under RCM will be paid at the rate of 18%.

Q: Can a tenant (service recipient) claim an input tax credit (ITC) for the GST paid under RCM on residential rent?
A : Yes, the tenant is eligible for ITC for the GST paid under RCM.

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