Business News. Apartments rented by companies for senior executives will cost more after recommendations of the GST Council came into effect earlier this week.
Renting an apartment by a registered entity will now attract an 18% Goods and Services Tax (GST) as per the recommendations.
“This would have a big impact on corporations who take guest houses on rent or take residential houses on rent for the use of their employees,” said Vivek Jalan, Partner, Tax Connect Advisory, a multi-disciplinary tax consultancy firm.
“Furthermore, going by experience in such cases, the input tax credit (ITC) of GST on this rent paid by corporates may be disputed by the GST department arguing on the basis of Section 17(5)(g) of the CGST Act 2017 where the ITC NSE 1.22 % of GST paid for any service for personal consumption is blocked,” Jalan added.
The GST will become a pure cost for companies as no tax credit will be available on these.
There was no GST on the lease of residential properties by individuals or corporations, although it was applicable on commercial properties such as offices or retail space on lease.
“The new GST law would increase the cost of every rent agreement where the transaction involves a registered person, such as a company or a corporation. The 18% additional cost on the rent could either be borne by the company or the landlord, depending upon the commercial arrangement thereof, “said Abhishek Jain, tax partner, KPMG India.
So, say a landlord is renting an apartment in Mumbai to a company “A” and charging Rs. 1 lakh as rent per month. The apartment is used by the CFO of the company. Every month, Rs 18,000 will be charged on this rent.
Many landlords and companies may renegotiate the rent agreements as to who will bear the cost of GST. Either both of them can split the cost, or they can absorb it entirely.
If the company decides to absorb the GST cost, it will become a pure cost and no input tax credit will be available.
“Input tax credit in respect of such transactions may be denied by the revenue authorities on the ground of the said services being for personal use of the employees,” said Jain.
An input tax credit is a mechanism under GST where part of the tax paid can be set off against future tax liability.
“This will impact the high-end rental transactions in metro cities as many MNCs take apartments on rent by paying anywhere between Rs 1 lakh and Rs 15 lakh a month and give them to top executives.
In cities like Gurgaon, Bangalore, Hyderabad, and Mumbai, landlords have given prime properties on lease to corporates,” said Pradeep Prajapati, founder of Wealthvisory Capital, a boutique real estate consultancy firm.
Renting of residential houses was exempted from GST till July 17, 2022.
However, the move will not impact the rental market in general as the largest market for tenants is amongst the salaried class, who will not be impacted by this change.
“It would not have any impact on the total outgoing for self-employed professionals and small business owners. However, residential leasing is an inherent demand which will not evaporate merely by higher taxation.
Certainly, there will be a marginal slump or rental stagnation, and rental yields in top cities can moderate in the coming months, as the market acclimates to the new tax-induced dynamics,” said Piyush Bothra, Co-Founder and CFO, Square Yards.
