GST Registered tenants face an 18% tax on rent paid, Do you have any questions about whether you need to charge and collect Goods and Services Tax (GST) on the rent you receive? When renting a home or a business, the GST is handled differently. On the other hand, paying rent is one of those essential expenses if you own a business. Therefore you might be interested in learning if you qualify for an input tax credit (ITC) for the GST you paid on the rental expense. Let’s examine each of these in more detail.
Renter’s income tax in the pre-GST era
In the pre-GST era, the landlord was required to register for service tax if the entire value of their taxable services, which includes rental income from all properties, exceeded Rs. 10 lakhs annually.
The landlord would not be subject to service tax as long as the total rental revenue (from all the properties that have been let out) did not exceed Rs. 10 lakh per year. Commercial properties rented out were subject to service tax under the former tax system. This still holds even if a home property is used for business purposes. A service tax of 15% of the rent was charged for commercial properties. Additionally, no service tax was applied to the rental income from residential properties.
CGST, SGST, or IGST Place of Supply Checking Procedure
The owner or landlord of the property may have registration in a state other than the one where the property is located. The landlord is given a choice. To determine if CGST, SGST, or IGST will be levied, they must specify the supply location. Here are a few of the cases we have put together for you.
Situation 1: In one instance, the taxpayer is situated in a different state from the one in which the rental property is located. Property shall be at the site of supply. As a result, since it is an interstate supply, IGST must be paid.
For instance, if Mr. ABC, registered for GST in Bangalore, rents out a business property in Haryana, an IGST of 18% will be applied. He is not required to register for GST in Haryana as well.
Scenario 2: The landlord and tenant are listed as residents of the state where the property is located. CGST and SGST at 9 percent each would be due if the landlord is a registered GST user in the same state as the property.
For instance, CGST and SGST of 9 percent each would be taxed if Mrs. XYZ, registered in Maharashtra, rents out her business property in Hyderabad.
Situation 3: The landlord is GST-registered in the same state as the property, but the renter is registered in a different state.
It is an intrastate transaction if the landlord has registered for GST in the state where the property is located. Therefore, regardless of the tenant’s location of GST registration, both CGST and SGST would be paid.
When this occurs, the tenant not registered in the same state as the property cannot claim the CGST and SGST input tax credits.
As an illustration, Mr. PQR, a resident of Kochi, travels to Bhopal for a customer meeting and lodges at the ABC Hotel. He rents a room for Rs. 15,000 per month. The ABC Hotel is located in the same city as its registered owners, Bhopal. Therefore, in this instance, both CGST and SGST would be taxed. Both tax components are distinct, though.
Since it was paid as CGST and SGST of a different state than the one in which he is registered, Mr. PQR is not eligible to claim the ITC of this GST.
How is GST on rented-out properties calculated?
For commercial properties that are rented out, the GST is computed and applied to the total amount of the periodic rent collections.
The GST (either 9 percent CGST and SGST or 18 percent IGST) will be computed on the rent due when an invoice is raised each period.
The GST is managed differently when renting a residence or a business. On the other side, paying rent is one of those necessary expenses if you run a business. Therefore, you might be curious to know if you’re eligible for an input tax credit (ITC) for the GST you paid on the rental expense.