Recommendation by 54th GST Council Meeting
Following the Council's 54th meeting on September 9, notice was given that the tenant would have to pay the GST through the reverse charge mechanism (RCM) if the property owner is not registered with the GST. This indicates that the cost must be deposited by the tenant rather than the owner. As an additional measure to enhance compliance, the Council has implemented the Reverse Charge Mechanism (RCM) to allow unregistered individuals to rent commercial property to registered individuals. This measure is viewed as an attempt to stop revenue leaks in the business renting industry, where transactions frequently go unreported.
The Registered Person receiving the Services will now be responsible for paying the GST, as per the RCM. This will guarantee that the GST on these transactions is accounted for and collected effectively. This also fits in with the larger objectives of the GST regime, which include increasing the number of transactions in the official economy and decreasing tax evasion.
What is RCM ?
Under the Goods and Services Tax (GST) system, the Reverse Charge Mechanism (RCM) is a taxation mechanism that transfers the receiver's tax payment obligation from the supplier of goods or services. RCM is normally relevant in certain situations where this transfer of responsibility is required due to the nature of the service or the provider category. RCM is applicable in some situations, and rent is thus a service that is subject to the GST regime.
Rent Under GST: An Overview
Renting of real estate are regarded as taxable services under the GST structure. This covers the leasing of office buildings, commercial real estate, and other types of real estate for business use. In general, residential properties are GST-exempt when rented for home use. Nonetheless, under the GST, commercial property rent is liable to an 18% tax.
The majority of the time, collecting and remitting GST on rent is the responsibility of the landlord or property owner. However, the Reverse Charge Mechanism causes this obligation to transfer to the tenant, who pays the rent.
RCM on Rent: A Closer Look
1. Renting from Unregistered Landlords:
When the landlord is not registered with the GST but the tenant is, this is one of the main situations in which rent is subject to RCM. In these situations, the tenant is responsible for paying GST in accordance with RCM. The main goal of this is to guarantee that GST is paid even in cases where the landowner or supplier is not registered.
Tenant obligation becomes an additional expense if they are a GST composition taxpayer, as they are not eligible to receive Input Tax Credit (ITC). Therefore, the RCM will be applied to the registered tenant liability. Tenants can lower their tax burden by claiming the RCM liability as an Input Tax Credit (ITC) if they are regular taxpayers under GST.
Only cash is accepted for payment of RCM liabilities. The ITC cannot be adjusted.
For small landlords, the RCM does not apply if their total revenue is less than the GST registration threshold (₹10 lakhs in certain special category states, ₹20 lakhs in most states).
Furthermore, RCM is not applicable and no GST is due on the rent if the tenant is not registered for GST.
2. Renting by Government or Local Authorities:
Renting government-owned or municipal government-owned real estate to a business that is registered is another situation in which RCM is relevant. The GST statute states that under the Reverse Charge Mechanism, the registered business tenant becomes liable for paying GST when a government body rents out services. This is only applicable in cases when the leased space is utilized for commercial activities.
3. Specific Exemptions for Residential Properties:
It is noteworthy that residential properties rented for personal residential use are not subject to GST and, therefore, RCM does not apply. RCM, where the tenant is required to pay GST, may apply, though, if a registered person rents a residential property for commercial purpose (like using it as an employee guesthouse).
PS : These changes are just recommendations by the GST Council and not yet notified by the department.
