The Goods and Services Tax (GST) applies to a broad spectrum of services, including rental income from leasing or letting immovable property. Recent clarifications by the GST Council and tax authorities have shed light on how rental services are taxed, addressing common doubts among property owners, tenants, and businesses.

Applicability of GST on Rentals

1. Commercial Properties

• GST is applicable on the rental income derived from leasing commercial properties such as shops, offices, and warehouses.
• The tax rate is typically 18% under the heading “Rental or Leasing Services involving own or leased non-residential property.”

2. Residential Properties

• For Personal Use: Rental income from residential properties used exclusively for personal purposes is exempt from GST.
• For Business Purposes: If a residential property is rented for commercial or business purposes, GST at 18% applies.

3. GST Threshold for Registration

Rental income is taxable under GST if:

• The annual rental income exceeds the aggregate turnover threshold of ₹20 lakh (₹10 lakh for special category states).

Reverse Charge Mechanism (RCM)

In certain cases, GST on rental services is payable under the Reverse Charge Mechanism (RCM):

• Corporate Tenants: If a registered corporate entity rents a residential property, GST must be paid by the tenant under RCM, as clarified in the GST Council’s recent updates.

Recent Clarifications

1. RCM Applicability

The GST Council clarified that renting residential property to a registered person for business purposes invokes RCM. This change, effective from July 18, 2022, aims to streamline compliance for landlords.

2. Input Tax Credit (ITC)

• Eligible for Commercial Rentals: Landlords leasing commercial properties can avail ITC on GST paid for maintenance, construction, or renovations.
• Not Available for Residential Rentals: No ITC is allowed on GST paid for renting out residential properties.

3. Mixed-Use Properties

For properties used partially for business and residential purposes, GST is levied proportionately based on the area used for business activities.

Compliance Requirements

• Invoices: Landlords must issue a GST-compliant invoice, mentioning their GSTIN, rate, and tax amount.
• Filing Returns: Regular filing of GST returns (GSTR-1, GSTR-3B) is mandatory for landlords registered under GST.

Practical Implications for Stakeholders

• Landlords: Ensure accurate classification of rental income and adherence to threshold limits to avoid penalties.
• Tenants: Businesses renting properties should account for RCM in their GST calculations.
• Tax Consultants: Stay updated on the latest rules to guide clients in complying with GST laws.

Conclusion

Understanding GST on rental services is crucial for landlords, tenants, and businesses to ensure compliance and optimize tax benefits. The latest clarifications have addressed ambiguities, particularly concerning the reverse charge mechanism and input tax credit eligibility. Consulting with tax professionals is recommended for personalized guidance.