GST on Rent of Shop or Office Under Reverse Charge Mechanism (RCM): GST on Commercial Property (Shop or Office) Rentals from Unregistered Landlord Lessee\'s (Business Owner) Liability RCM Effective from 10th October 2024

From October 10, 2024, Registered Traders Liable for 18% GST on Commercial Property Rentals from Unregistered Persons under RCM

From October 10, 2024, under the updated GST regulations, if a registered trader rents a commercial property from an unregistered person or organization, the trader must account for 18% GST under the Reverse Charge Mechanism (RCM). The key points are as follows:

On October 8, 2024, the Central Board of Indirect Taxes and Customs (CBIC) issued Notification No. 09/2024 - Central Tax (Rate), introducing a new provision under the Goods and Services Tax (GST) regime. Effective from October 10, 2024, this amendment places the responsibility of paying 18% GST on the lessee (tenant) when renting commercial properties from unregistered landlords. This shift in compliance falls under the Reverse Charge Mechanism (RCM), ensuring tax compliance and preventing revenue leakage in the commercial real estate sector.

This article outlines the impact of this regulation, procedural changes, and financial implications for registered traders renting commercial properties from unregistered landlords.

Key Updates in GST Regulations Effective from October 10, 2024

1. Self-Invoicing Requirement: The registered lessee (tenant) is required to issue a self-invoice as per Section 31(3)(f) of the CGST Act, 2017. This document must declare an 18% GST on the rent amount paid to the unregistered landlord.
2. Tax Payment via GSTR-3B: The registered tenant must report and pay the 18% GST liability through their GSTR-3B return, which is applicable under the RCM. In this case, the tenant is responsible for remitting the GST amount instead of the unregistered landlord.
3. No Rent Agreement Scenarios: Even if no rent is formally paid (such as through consent agreements with related parties), the lessee is still required to account for the 18% GST under RCM to prevent tax evasion in related-party transactions.

GST Taxability on Leasing of Residential and Commercial Properties

The tax treatment of leasing properties-whether residential or commercial-under GST varies based on the recipient\'s registration status. Below are key differences:

1. Residential Property Leasing:

• Prior to July 18, 2022: Exempt from GST for residential use, irrespective of the recipient\'s registration status.
• From July 18, 2022: GST became applicable at 18% under RCM for registered tenants only. If the tenant is unregistered, the exemption continues to apply.

2. Commercial Property Leasing:

The 54th GST Council meeting in September 2024 recommended expanding the scope of RCM to include leasing of commercial properties by unregistered persons to registered tenants, attracting 18% GST.

Changes Introduced by Notification No. 09/2024

The new provisions introduced by Notification No. 09/2024 focus on shifting the GST liability for certain commercial property leases from the unregistered landlord to the registered tenant, applicable under the RCM.

Table of Changes:

From October 10, 2024, registered tenants renting commercial properties from unregistered landlords must account for 18% GST under RCM, regardless of whether the landlord is GST-registered.

Special Cases and Implications for Different Taxpayers

1. Composite Dealers:
2. Exempted Item Suppliers:
3. Hotels and Restaurants (5% GST):
4. Hospitals:
5. Petrol Pumps:
6. Bars and Restaurants:

• Must pay 18% GST on rent under RCM if the landlord is unregistered.
• Cannot claim Input Tax Credit (ITC), which increases their effective tax burden.
• Must pay 18% GST under RCM even if the output supplies are exempt. ITC may be claimed, but no practical benefit is gained due to output supply being exempt.
• Required to pay 18% GST on rent under RCM but cannot claim ITC.
• Hospitals providing exempted healthcare services must still pay 18% GST under RCM for rented premises, but ITC offers little practical benefit as their supplies are exempt.
• Petrol pumps must pay 18% GST on rented land or buildings under RCM, significantly impacting their cash flow since they sell both GST-exempt (petrol, diesel) and taxable (oil) items.
• Bars and restaurants must pay 18% GST on rent under RCM, with high amounts in the credit ledger, creating cash flow issues due to the cash-only payment of RCM.

GST Applicability Based on Tenant and Landlord Registration Status

The following table summarizes GST liability based on different tenant and landlord combinations:

Impact on Cash Flow and Compliance

The new regulation, while ensuring greater compliance in the commercial leasing sector, imposes additional cash flow burdens on businesses, particularly those that cannot claim ITC or face restrictions on its use. Registered tenants, especially small and medium-sized businesses renting from unregistered landlords, must adapt to this new compliance responsibility and adjust their cash flow management accordingly.

Conclusion

The introduction of RCM on commercial property rentals from unregistered landlords is a significant change in GST compliance that ensures tax accountability in cases where landlords remain outside the GST framework. While registered tenants must now shoulder the tax burden, they can claim ITC provided the rented premises are used for taxable business activities. However, the move poses a challenge for businesses unable to claim ITC, particularly in sectors like hospitality, healthcare, and composite dealers, potentially impacting cash flow and increasing operational costs.