Residential accommodations attracts GST? An analysis with case law

*(AAR - Authority for Advance Ruling - Karnataka)
Advance Ruling No. KAR ADRG 17/2020, Dated 23rd March, 2020

Clarification required to be sought

• Whether exemption prescribed under entry number 13 of notification no. 9/2017- integrated tax (rate) dated. 28th June, 2017 can be sought and the lessors (here Ambrish Vasudeva and 4 others) need not charge GST while issuing the invoice for the lease service to M/s. Dtwelve Spaces Pvt Ltd. ?
• Whether the lease service falls under the Exemption prescribed and can be described as "Services by way of renting of residential swelling for use as residence"? as listed in the aforesaid Notification.

Case Overview

Sri. Taghar Vasudeva Ambrish have filed an application before the Karnataka Authority for Advance Ruling Goods and Service Tax to sought clarification on GST applicability to Sub-Leasing Services, i.e. whether GST applicable to Sub-Leasing Services would attract Goods and Services Tax.

The application have been filed by the applicant for Advance Ruling under Section 97 of the CGST Act,2017 read with Rule 104 of CGST Rules, 2017 and Section 97 of the KGST Act, 2017 read with Rule 104 of KGST Rules 2017 & KGST Rules 2017, in FORM GST ARA-01 discharging the fee of Rs.5,000/- each under the CGST Act and the KGST Act.

Purpose of AAR (Authority of Advance Rulings)

To provide certain aid to the taxpayers related to unerring interpretation of the legal provisions under the GST Regime.

Applicant's (Sri. Taghar Vasudeva Ambrish) key points

• He is a proprietary concern registered under the provisions of the GST Act, 2017
• Engaged in the business of providing affordable residential accommodation to students on a long term basis (Period starting from 3 to 11 months)

Facts represented by Applicant

• The applicant along with four others collectively has let out a Residential complex to M/s. D. Twelve Spaces Pvt. Ltd which is engaged in the business of providing affordable residential accommodation to students on a long term basis (starting from 3 to 11 months).
• And the Company is also engaged in providing a host of other services such as maintenance, food, Wi-Fi etc. generally called as a Paying Guest Accommodation.
• the Company is also engaged in providing a host of other services such as maintenance, food, Wi-Fi etc. generally called as a Paying Guest Accommodation.
• Schedule II enlists activities to be treated as supply of goods or as supply of services. Entry 2(b) reads as any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.
• Under Notification No. 9/2017-Integrated Tax (Rate) dated 28th June, 2017, certain exemptions have been prescribed for specified activities and it provides that: "Services by way of renting of residential dwelling for use as residence" are exempt from GST."
• Agreement with Students: M/s. DTwelve Spaces Pvt. Ltd. Has entered into sub lease agreement with students for providing residential accommodations with living amenities, security, entertainment facilities for a long stay for a period varying from 3 months to 11 months.
• Mr. Ambrish Vasudeva along with four others have let out a residential complex to the Company to conduct their business are of the view that GST should be charged for invoices raised towards lease service.

Facts of M/s. D. Twelve Spaces Pvt. Ltd.

The Company has concluded that

• Rental accommodation services provided by the Company to the students will not attract GST
• There would be no GST obligation on the Company in case of lease arrangement with their lessor too (Here Ambrish Vasudeva and 4 others).
• The lessor should not charge GST to the Company when issuing the invoice for the lease service.

Key Definitions relevant to this Case Law

• Schedule II enlists activities to be treated as supply of services.
• "Business" - (Section 2(17) of the CGST Act 2017)

"business" includes 

Further any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities."

• "supply" - Section 7 of the CGST Act

"supply" include all forms of supply such as lease, rental made or agreed to be made for a consideration by a person in the course or furtherance of business. Section 7(1-A) guides in determining whether a supply shall be treated as supply of goods or supply of services as referred to in Schedule II.

Key Points discussed by Authority

1. CGST Act and the KGST Act, provisions are the same except for certain provisions.
2. As per Lease Deed:
   • lessors (totally live in number) have collectively leased out their premises to the Company by way of a single agreement.
   • the property consists of "42 room along with the 2400 sq.ft of terrace area" on the execution date.
   • para 7.1 of the agreement shows very clearly that the consideration for the contract is settled at Rs. xxx per month. The consideration payable is paid to the bank accounts at a fixed percentage of that monthly rent.
   • contract is for the entire property and the lessors have pooled their individual properties into a single one
   • para 12 of the agreement also proves that the entire property is let out as the lessee has taken the total property from the lessors and has the right to sub-lease to any third party.
3. applicant is not providing the service in individual capacity to the lessee, but as a part of the group of lessors.
4. Lessors are providing the service of leasing / renting of the immovable property for a consideration due to following reasons:
   • providing the right to use the immovable property without transfer of the ownership of the immovable property.
   • Supply has been defined as – "any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services."
5. Providing services of leasing of a building for business or commerce to the Company as a group of persons after pooling in their assets.

Final Statement by Authority

• the applicant is not providing service to the Company, but as a part of the group, for the transaction between the Group and the Company, invoice needs to be issued by the Group to the Company.
• the transaction between the individuals and the Group are a different transactions, as the individuals are distinct from the Group of Individuals.
• The exact nature of the group cannot be ascertained.
• applicant himself is not effecting any supply of service to the Company directly.

Order by AAR: Advance Ruling No. KAR ADRG 17/2020, Dated 23.03.2020

1. The exemption prescribed under entry no. 13 of Notification No.9/2017 -Integrated tax (Rate) dated 28th June 2017 cannot be sought and the lessors (as an entity) have to charge GST while issuing the invoice for the lease services to M/s DTwelve Spaces Pvt. Ltd, provided they are registered under the GST Act.

2. The lease services does not fall under the exemption "Services by way of renting of residential dwelling for use as residence" as listed in entry 13 of Notification No.9/2017 - Integrated tax (Rate) dated 28th June 2017.

Comment by Experts

a) Sh. Rajat Mohan AMRG & Associates Senior Partner: "Though ruling has some basic logic to it, still it is expected to open a Pandora's box of litigation for numerous individuals earning passive income".

b) Harpreet Singh, partner at KPMG India: "With this ruling, lessors may not have the comfort of presuming GST to be exempt, where end use of the property is residential,"

Conclusion by AAR

GST is applicable on residential accommodation sublet by a tenant. This AAR order dated March 23 is likely to trigger a number of litigations. The exemption prescribed cannot be sought and the lessors have to charge GST while issuing invoice for the lease services."

Effects of this Ruling

Tax authorities could well begin demanding 18% GST applicable on renting out commercial property from landowners leasing residential hostel-style accommodations to schools, colleges, educational institutions, offices, corporates, or any other establishment.

Author View

1. AAR is generally pro-revenue-centric. and is applicable to specific case only
2. Order is binding on the assessee in whose case ruling has been pronounced.
3. This ruling can be challenged at Higher Authority, Appellate Authority for Advance Ruling ('AAAR').
4. Authority in a view that property given out for sub-renting matched the criteria of a hotel – rooms with attached bathroom and other facilities.
5. Now we need to carefully consider the facts of each case to determine whether the amount paid to a director is with respect to his employment with the company or with respect to an independent professional service in order to determine the liability of GST on such payment.

Link of the order copy: Click Here

Disclaimer: IN NO EVENT THE AUTHOR SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM OR ARISING OUT OF OR IN CONNECTION WITH THE USE OF THIS INFORMATION.

Sources:

• Karnataka AAR Order Copy
• News Clips
• Goods and Service Tax Provisions