Background
The hostels and PGs are providing basic living facilities to millions of people across the country. This is largely an unorganized sector with a majority of small players, who are mainly enabling low-cost accommodation to out-of-station students from smaller cities or villages across India as well as to migrant workers from poorer and weaker sections of society. Such hostels provide basic facilities, with students and others often sharing rooms for accommodation purposes, and some incidentals like food and laundry may also be there.
Under the GST regime, from 1.7.2017 until 17.7.2022, exemption has been given to residential dwellings for use as residences. Also, there has been an exemption under GST for the hostels and PG's that are charging less than or equal to Rs. 1000 per day per unit of accommodation. Thus, the activity of renting residential units was covered under the exemption list. These GST exemptions were intended to provide cheaper housing to all, especially the poorer sections of society.
Entry 12 of exemption notification no. 12/2017-CT (Rate) covers Heading 9963 or Heading 9972, "Services by way of renting a residential dwelling for use as a residence.".
On perusal of the above entry 12, it is clear that the services provided by way of renting a residential dwelling for residential purposes are covered under the exemption. The words 'residential dwelling for use as residence" do not refer to the use made by any particular person but rather to the attributes of the property to which its use was suited as a residential dwelling. The exemption is available to the service and does not specify by whom such units are to be rented in order to avail of the exemption. It could be either a company or any individual person.
In other words, the exemption was being given to any person who may engage in the renting of a residential dwelling used as a residence. It is not specifically set out in the notification what would be considered a short stay or a long stay. This exemption benefit was available when landlords rented out to corporations, who in turn rented out to students, working professionals, or others. The same exemption was also available when renting was done as residence to students by corporate PGs or other commercial entities.
However, "residential dwelling used as residence" connotes some permanence in stay.
'Certain/considerable period of stay' is also not defined under GST. However, a cue could be taken from Section 65(105)(zzzzw) of the Finance Act, 1994 (as prior to 2012), which provides the definition of taxable service for services provided by hotels, inns, guest houses, etc., which generally involve stays for a shorter period as compared to a permanent or considerable period of stay, provided that the said service is providing accommodation for a continuous period of less than 3 months.
From the above, it could be said that less than 3 months can be considered a period of temporary stay, and anything more than that could be said to be of a nature other than temporary.
Changes made in exemptions from July 18, 2022, onwards
However, as per Notification No.4/2022-CT(R) issued on July 13, 2022, which amended the exemption notification 12/2017-CT(Rate), the following has been brought into the tax net w.e.f. July 18, 2022:
(a) Renting a residential dwelling for use as a residence is exempt [HSN 9963/9972] except where the dwelling is rented to a registered person. It is taxable at 18%.
(b) Further, tax is required to be paid under reverse charge by the registered person.
It is important that the GST exemption be continued to be available post-July 18, 2022, when the service provider's PG's or hostels rent out to B2C customers, such as students or others intending to stay for a longer period [eexceeding 3 months].
The exemption was no longer available post 18.7.2022 for hotel accommodation priced less than or up to Rs. 1000/day, which would be taxed at 12%.
Changes after the 53rd GST Council meeting and July 2024
Post-53rd GST Council meeting and Budget 2024, a new exemption entry 12AA has been inserted in notification 12/2017-CT® as under wrf 15.7.2024:
- Supply of the accommodation service having a value less than or equal to Rs. 20,000 per person per month; and
- Said accommodation service was supplied for a minimum continuous period of 90 days.
Also, changes are made in Entry 12 in said notification. Further, there was a clarificatory circular 228/22/2024-GST setting out that, as recommended by the GST Council, the GST liability on accommodation is regularized on an "as is, where is basis" for periods 1.7.2017 to 14.7.2024 where the value of accommodation is less than or equal to Rs.20,000 per person per month and such accommodation is provided for a minimum continuous period of 90 days.
In this backdrop, the paper writer has examined the impact of the latest GST exemption entry 12AA, amendments in entry 12 and circular 228.
Impact of Recent Amendments in GST Exemption to PG's/Hotels
Who can claim GST exemption?
The exemption under sl. no. 12AA would be available under 15.7.2024 if the following aspects are satisfied: When residential accommodation is provided:
(a) Where the value is less than or equal to Rs. 20,000 per person per month
(b) The period of stay of such customer is 90 days or more, i.e., a longer stay.
It is significant that this entry covers only heading 9963.
Further, there has been a connected amendment done in Entry 12 as under:
The amended exemption entry Sl. No. 12 of Notification No. 12/2017 (amended via Notification 4/2024 CT(R) dated July 15, 2024) reads as follows:
Services by way of renting a residential dwelling for use as a residence, except where the residential dwelling is rented to a registered person.
Explanation 1. For the purpose of exemption under this entry, this entry shall cover services by way of renting a residential dwelling to a registered person where,
(i) The registered person is the proprietor of a proprietorship concern and rents the residential dwelling in his personal capacity for use as his own residence; and
(ii) Such renting is on his own account and not that of the proprietorship concern.
Explanation 2.: Nothing contained in this entry shall apply to
(a) accommodation services for students in student residences;
(b) accommodation services provided by hostels, camps, paying guest accommodations, and the like.
Until July 14, 2024, Sl. No. 12 of Notification No. 12/2017 CT(R) covered Heading 9963 as well as Heading 9972. However, with effect from July 15, 2024, the exemption entry covers only services classifiable under Heading 9972. The services covered in headings 9963 and 9972 are set out further.
Further, Explanation 2 has been added to Sl. No. 12 of Notification No. 12/2017 CT(R) dated July 15, 2024, to clarify that such entry does not cover accommodation services for students in student residences or accommodation services provided by hostels, camps, paying guest accommodations, and the like.
Note: There is no change in the GST reverse charge applicable on renting a residential dwelling to a GST-registered person under Section 18.7.2022.
The relevant explanatory notes to the Scheme of Classification of Services for the Heading 9963 "Accommodation, Food, and Beverage Services" are as follows:
- SAC 99632,Other accommodation services," includes accommodation services for persons for a longer period of time and also includes semi-permanent residence in boarding houses and residential clubs.
- 996321 Room or unit accommodation services for students in student residencesThis service code includes room or unit accommodation services for students in student residences attached to schools and universities.
- SAC 996322: "Room or unit accommodation services provided by hostels, camps, paying guests, and the like" includes room or unit accommodation services provided by hostels, camps, or paying guests. This HSN/SAC includes accommodation services for workers in worker's hostels or camps, usually on a short-term or seasonal basis.
- SAC 996329, "Other room or unit accommodation services, n.e.c." includes room or unit accommodation services for semi-permanent residents in rooming or boarding houses and residential clubs; sleeping car services, etc.
Further, the relevant explanatory notes to the Scheme of Classification of Services for the heading "Real Estate Services" are as follows:
Group 99721: Real estate services involving owned or leased property
SAC 997211 Rental or leasing services involving own or leased residential property include rental or leasing services concerning residential properties by owners or leaseholders of houses, flats, apartment buildings, and multiple-use buildings that are primarily residential, as well as residential mobile home sites.
This SAC does not include:
Accommodation services provided by operating hotels, motels, rooming houses, school dormitories, campsites, and other lodging places are covered under heading 99631.
Based on the above explanatory notes, Heading 9963 covers room or unit accommodation services, hostels, camps, paying guests, and the like. Heading 9972 covers rental or leasing services concerning residential properties by owners or leaseholders's houses, flats, apartment buildings, and multiple-use buildings that are primarily residential, as well as residential mobile home sites.
Impact of the above changes
- The intention of the revenue appears to be to extend exemption at SL No. 12AA to the service provider's/hostels renting out accommodation per bed, per room, or per unit to customers such as students or professionals. subject to satisfying the monetary limit of Rs. 20k per month and staying 90 days or more.
- When food, internet, and other amenities are provided incidentally to the room or unit accommodation [no optionality], then it is a composite supply, whereby if, by adding up these facilities, the value exceeds Rs. 20,000, then exemption is not available even if the stay is for 90 days or more.
- The exemption at entry 12 would continue to be applicable to renting or leasing residential dwellings, for instance, flats or houses rented to families for a period exceeding 3 months.
Coming to Circular No. 228 set out above, it seems to create disparity, violating Article 14 of the Constitution's "Equality before Law" for the following reasons:
a. Regularization "as is, where is basis" for periods 1.7.2017 to 14.7.2024 where the value of accommodation is less than or equal to Rs.20,000 per person per month and such accommodation is provided for a minimum continuous period of 90 days.
b. No refund option is indicated for the tax payers, namely service provider PG's or hostels, who paid taxes in past years out of pocket, in spite of being validly eligible for exemption.
c. In paper writer view, those who did not pay tax in the past [prior to July 14, 2024] are given relief of exemption; similarly, in paperwriter view, those who paid taxes [borne burden] should be eligible for refunds [without time limit].
d. Once the amount was wrongly paid [not required to pay], it takes the character of "aamount" not tax, and the time limit for refunds [2 years from payment] is not applicable. Valid to examine refund route.
Way ahead for the future
- PG's/Hostels can claim exemption at entry 12AA when they rent out accommodation to students, professionals, or others for less than or equal to Rs. 20,000 per month per person for 90 days or more.
- When the PG's or hostels suppliers are only providing such exempted supplies, they are not required to take GST registration under Section 23(1) of the GST law.
- When not having GST registration, there would be no tax liability to pay tax under RCM on rentals paid to the landlords who rent out the building either.
Conclusion
The intention of the government, as we understand it, was/is not to deny benefit to students as well as to provide accommodation to weaker sections. Providing affordable housing for the lower and middle-income segments, mainly students and migrant workers from low-income groups, is part of the inclusive growth agenda.
However, the GST on the renting of low-cost accommodation [where the period of stay is less than 90 days] at 12% and the RCM on landlord rentals at 18% in the hands of GST-registered recipients such as PG vendors are adding to costs, being collected from, and adversely impacting the students and low-income working persons.
The author can also be reached at roopa@hnaindia.com.
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