“Rajasthan AAR Rules Lessor Liable for GST on Commercial Use of Residential Property”

Key Takeaways:

1. Nature of the premises is determined by its use, not just its official designation.
2. Renting a residential property for commercial use falls under a taxable supply category with an 18% GST rate.
3. The Lessor is liable to pay GST on a forward charge basis, and the Reverse Charge Mechanism does not apply in this scenario.
4. The ruling highlights the significance of the purpose for which the premises is being used in determining its nature under the GST framework.

Synopsis:

The Advance Ruling Authority of Rajasthan, in the case of In Re: M/s. Deepak Jain [Advance Ruling No. RAJ/AAR/2023-24/14 dated November 29, 2023], addressed the issue of whether the Lessor is liable to pay Goods and Services Tax (GST) on a forward charge basis when a residential property is rented out for commercial purposes. Here are the key points from the ruling:

Case Background:

The Applicant, M/s. Deepak Jain, a practicing Chartered Accountant, is the owner of a property in Jaipur, which is designated for residential use by the Jaipur Development Authority.

The Applicant entered into a lease agreement with Back Office IT Solution Pvt. Ltd., a registered entity under the GST Act, for the commercial use of the premises.

Ruling Highlights:

1. Nature of Premises: The AAR observed that even though the nature of the premises had not been officially changed by the Authority, it would not be considered as residential in nature due to its commercial use.
2. Taxable Supply: The AAR noted that the supply of service, i.e., renting for commercial use, falls under SAC 997212 and is taxable at the rate of 18 percent under the GST regime.
3. Liability of Lessor: The AAR opined that the Lessor is liable to pay GST at the aforementioned rate on a forward charge basis, and the Applicant is not required to pay GST under the Reverse Charge Mechanism as per the terms of the Notification.
4. Residential Dwelling Exclusion: The AAR ruled that the premises would not come within the purview of residential dwelling as per the Notification, emphasizing the importance of the purpose for which the premises is being used.

Conclusion:

The ruling establishes that when a residential property is rented out for commercial purposes, the Lessor is liable to pay GST on a forward charge basis. It emphasizes the significance of the purpose for which the premises is being used in determining its nature under the GST framework.

FAQ:

Q1: What is the tax rate for renting a residential property for commercial use under the GST regime?

A1: Renting a residential property for commercial use falls under SAC 997212 and is taxable at the rate of 18 percent.

Q2: Who is liable to pay GST when a residential property is rented out for commercial purposes?

A2: The Lessor is liable to pay GST on a forward charge basis in such scenarios.

Q3: Does the Reverse Charge Mechanism apply when a residential property is rented out for commercial purposes?

A3: As per the terms of the Notification, the Applicant (Lessor) is not required to pay GST under the Reverse Charge Mechanism in this context.