Introduction
Are you renting out your property or leasing a commercial space? If so, recent changes in the Goods and Services Tax (GST) laws will impact you, especially if you’re an unregistered landlord renting to a registered business. The Central Board of Indirect Taxes and Customs (CBIC) has issued Notification No. 09/2024-Central Tax (Rate), which introduces new rules for GST on rent income, effective from 10th October 2024.
In this guide, we’ll simplify the latest GST on rental properties and help you understand how they affect rental income from commercial properties. Whether you’re a landlord or a tenant, this is important information for you.
What’s New in the GST Rules?
The key change in the recent notification is the introduction of the Reverse Charge Mechanism (RCM) for rental properties. Under RCM, the responsibility to pay GST shifts from the landlord (supplier) to the tenant (recipient). This new rule applies when an unregistered landlord rents commercial properties to a registered tenant.
Previously, unregistered landlords weren’t required to collect or pay GST on rental properties. Now, under the new guidelines, the tenant—if they are a registered GST entity—will be liable to pay GST directly to the government.
Key Details of the Notification:
Notification Number | Date Issued | Effective Date |
09/2024-Central Tax (Rate) | October 8, 2024 | October 10, 2024 |
What is Reverse Charge Mechanism (RCM)?
Under the Reverse Charge Mechanism (RCM), instead of the supplier (landlord) paying GST, the recipient (tenant) becomes responsible for paying the tax. This rule is especially significant for businesses renting properties from unregistered landlords. It ensures better compliance and prevents tax evasion.
How RCM Works:
- When is RCM applicable?
RCM is triggered when an unregistered landlord rents a property to a registered tenant. The tenant must then calculate and pay GST on rent of commercial property directly to the government. - GST Payment Responsibility:
In this case, the tenant must deposit the GST amount to the government, rather than paying it to the landlord. - Input Tax Credit (ITC):
The tenant can claim Input Tax Credit (ITC) for the GST paid under RCM, as long as the property is used for business purposes. This helps reduce the overall tax burden for the tenant. - Compliance:
Tenants must report these RCM transactions in their GST returns, ensuring that all payments and credits are properly accounted for.
How This Affects the Commercial Real Estate Sector
This new rule affects both landlords and tenants. Unregistered landlords who lease commercial properties need to inform their tenants about the change. On the other hand, registered businesses renting such properties must ensure they comply with the RCM rule and pay GST on rental commercial property.
Example:
Imagine a scenario where Mr. Singh, an unregistered property owner, leases a shop to ABC Pvt. Ltd., a registered company. Previously, Mr. Singh wasn’t required to charge GST on rent income. However, under the new rules, ABC Pvt. Ltd. must now pay the GST on the rent directly to the government, and they can later claim an Input Tax Credit (ITC) on the same.
RCM for Commercial Properties
Nature of Property | Landlord’s Status | Tenant’s Status | GST Paid By | RCM Applicability |
Commercial | Registered | Registered | Landlord | No |
Commercial | Registered | Unregistered | Landlord | No |
Commercial | Unregistered | Registered | Tenant | Yes |
Commercial | Unregistered | Unregistered | N/A | N/A |
Impact of RCM on Tenants
For tenants, the introduction of RCM shifts the tax burden. Now, tenants leasing properties from unregistered landlords are required to calculate, deposit, and claim input tax credit (ITC) on the GST on rent of property paid under RCM.
Example Scenario:
Mr. A (an unregistered property owner) rents his commercial space to XYZ Pvt Ltd (a registered business). Earlier, Mr. A was not required to charge GST on rental commercial property, but now, XYZ Pvt Ltd must pay GST directly to the government under RCM.
Important Compliance Checklist
For businesses involved in commercial rentals, compliance is crucial to avoid penalties. Here’s a simple checklist to guide you:
Task | Description |
Verify GST Registration | Ensure that the tenant is registered under GST to apply RCM. |
Pay GST on Rent | Tenants must calculate and deposit the GST on rent directly to the government. |
Receive Tax Invoice | Tenants should keep a record of the tax invoice for compliance. |
File GST Returns | Regularly file GST returns, including RCM payments. |
For detailed information on GST registration, you can visit our guide: What is GST and How it works?
GST Applicability on Residential Properties
For residential properties, GST on rental properties depends on whether the property is used for business or personal purposes. Properties rented for personal use are exempt from GST, while those rented for business purposes may attract GST under specific conditions.
RCM for Residential Properties
Nature of Property | Landlord’s Status | Tenant’s Status | GST Paid By | RCM Applicability |
Residential | Registered | Registered (Business use) | Tenant | Yes |
Residential | Registered | Registered (Personal use) | Exempt | No |
Residential | Registered | Registered | Exempt | No |
Residential | Unregistered | Registered (Business use) | Tenant | Yes |
Residential | Unregistered | Registered (Personal use) | Exempt | N/A |
Residential | Unregistered | Unregistered | N/A | N/A |
Why the Changes Matter
These updated guidelines, effective from 10th October 2024, help clarify the GST implications on property rentals, especially concerning GST on rent of movable property and unregistered landlords. For commercial properties, this change primarily targets tenants renting from unregistered landlords to ensure GST compliance through RCM.
For residential properties, the exemption for personal use remains intact, providing relief to individuals who are renting homes for personal reasons. However, if a residential property is used for business purposes, the registered tenant must be prepared to handle GST payments under RCM.
Conclusion
Whether you are a landlord or tenant, staying updated with the latest GST rules is essential to avoid penalties and ensure compliance. If you’re renting a commercial property from an unregistered landlord, RCM applies, and you must pay the GST on rental commercial property directly. For those renting residential properties for personal use, there’s no need to worry as residential rents remain exempt from GST.
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Contact us at 766 515 6000 to consult with our leading tax consultants in Jaipur. We provide expert guidance on GST on rent income, GST on rental commercial property, GST on rent of movable property and more to ensure your business remains GST-compliant.