GST is payable on leasing of property in the nature of a hostel
Notification 09/2017-Integrated Tax (Rate), dt. 28-06-2017 notifies the exemptions on supply of services under IGST Act. According to entry number 13 of the said notification, Services by way of renting of residential dwelling for use as residence are exempt for GST. However, is such exemption available when the property is rented out for renting purposes but in the nature of a hostel or inn? Let us refer to the case of Taghar Vasudeva Ambrish (GST AAAR Karnataka), where a similar issue was under consideration.
Facts of the Case:-
- Taghar Vasudeva Amrish (Appellant) along with four other joint owners collectively leased out a multi-storied property to M/s DTwelve Spaces Pvt Ltd (lessee).
- The property which was leased out comprised of a stilt floor (having two rooms) plus ground and four floors with each floor having 8 rooms.
- The Appellant was the sole and absolute owner of the stilt and ground floor in the building. The first, second, third and fourth floor of the said building was owned solely and absolutely by each of the joint owners.
- The Appellant along with the other four owners jointly entered into a Lease Deed Agreement with the Lessee in terms of which the above said multi-storied property was leased out for a period of 9 years to the lessee.
- The monthly rent was paid to the respective accounts of the lessors in an agreed percentage.
- The Lessee had obtained the said property on lease for the purpose of sub-leases/sub-licences such residential premises to individuals (including students) for the purpose of long-stay accommodation.
The Appellant approached the Authority for Advance Ruling (AAR) seeking a ruling on the following questions:-
- 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 need not charge GST while issuing the invoice for the lease service to the lessee.
- 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?
The AAR gave the following ruling:-
- The exemption prescribed under entry 13 of notification no. 9/2017-integrated tax (rate) dated. 28th June, 2017 cannot be sought and the lessors have to charge GST while issuing the invoice for the lease services to the lessee, provided they are registered under the GST Act.
- 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.
- Aggrieved with the order of the AAR, appellant filed an appeal before the Appellate Authority on Advance ruling (AAAR)
Reference to Notification no 9/2017 Integrated tax (rate) dated. 28th June, 2017 by AAAR
- The issue to be decided in this appeal was whether the activity of leasing of property by the Appellant jointly with four others was exempted from GST by virtue of the exemption in entry No 13 of notification no. 9/2017-integrated tax (rate) dated 28th June, 2017.
- According to Entry No 13, Services by way of renting of residential dwelling for use as residence (falling under Heading 9963 or 9972) are exempt under GST.
- Heading 9963 pertains to Accommodation, Food and beverage Services and Heading 9972 refers to Real Estate Services.
- The explanatory note to the scheme of classification of services described the service code 997211 as “Rental or leasing services involving own or leased residential property”.
- This service code includes rental or leasing services concerning residential properties by owners or lease holders houses, flats, apartment buildings, multiple-use buildings that are primarily residential, residential mobile home sites.
- This service code did not include accommodation services provided by operating hotels, motels, rooming houses, school dormitories, camp sites and other lodging places, cf.99631.
Observations of AAAR on whether a hostel building is a residential dwelling or not
- In the instant case, the Lease Deed revealed that a property had been rented to M/s DTwelve Spaces Pvt Ltd by the Lessors who were also the owners of the said property.
- The Appellant claimed that the property which was leased to the lessee was a residential property.
- They also relied on several judicial pronouncements to emphasize that a “residential dwelling” is a place where people live or stay for a considerable period of time.
- Notification no. 9/2017-integrated tax (rate) as well as the GST law did not define the term “residential dwelling”.
- However, in the CBIC Education Guide dated 20 June 2012 which gave clarifications in the context of Service Tax laws it was mentioned that in the absence of a definition of the term “residential dwelling”, one has to interpret the same in terms of normal trade parlances as per which it was any residential accommodation, but did not include hotel, motel, inn, guest house, camp-site, lodge, house boat or like places meant for temporary stay.
- AAAR found from the records submitted by the Appellant that, the impugned property was constructed as Hostel building.
- The project description in the sanctioned plan indicated that the plan was for the construction of a hostel building. Issue was could a hostel building be called as a residential dwelling?
- A common understanding of a hostel was that of an establishment which provided inexpensive accommodation to specific categories of persons such as students, workers, travelers.
- A common understanding of the term “residential dwelling” was one where people resided treating it as a home.
- The Appellant had constructed the building with the intention of providing hostel accommodation which was more akin to sociable accommodation rather than what was commonly understood as residential accommodation.
- Therefore, AAAR concluded that the property could not be termed as “residential dwelling”.
- Once the property was not a residential dwelling, the exemption under Entry 13 of notification no. 9/2017-integrated tax (rate) would not apply to the renting/leasing of such property.
Observations of AAAR on the argument of the Appellant that the lessee had taken the property on lease for purpose of running a paying guest accommodation for students
- Appellant submitted documents to evidence that the students resided in the accommodation between 3 months and 12 months.
- They argued that since there was a certain degree of permanency in the students stay at the property, it could be said that the property was used for purposes of residence.
- The exemption given by Entry No 13 of notification no. 9/2017-integrated tax (rate) dated 28th June, 2017 was to residential dwellings which were rented out for use as residence.
- Assuming but not admitting that the property was a “residential dwelling”, the same had to be used as a residence by the lessee.
- In this case the lessee was using the property for conducting his business of running a paying guest accommodation.
- The exemption was available only if the residential dwelling was used as a residence by the person who has taken the same on rent/lease.
- The term “for use as residence” as appearing in Entry No 13 of notification no. 9/2017-integrated tax (rate) implied that the recipient of service should use the dwelling as residence.
- In other words, the service of renting of residential dwelling to a recipient who used the same as residence was exempted from GST
- In the instant case, the lessee M/s DTwelve Spaces Pvt Ltd, who was the recipient of the service of renting provided by the Appellant, was not using the leased property for use as residence but was using the same for operating his business of providing paying guest accommodation to students.
- On this ground too, AAAR found that the Appellant was not eligible for the benefit of exemption as per Entry No 13 of notification no. 9/2017-integrated tax (rate).
Observations of AAAR on the contention of the appellant that the ruling pronounced by the Authority after the mandated period of 90 days was unsustainable in law
- Appellant submitted that the online filing of the application should be taken as the date of filing the application and not the date when they submitted the manual application for advance ruling.
- They claimed that having filed an online application, there was no order directing them to file a manual copy of the application and hence the date of online filing must be considered as the date of application.
- In this connection, AAAR held that as per Rules 104 and 106 of the CGST Rules, 2017, the application for obtaining an advance ruling and filing an appeal against an advance ruling shall be made by the applicant on the common portal.
- However, due to the unavailability of the requisite forms on the common portal, a new Rule 107A was inserted vide notification No. 55/2017-Central Tax, dated 15.11.2017, which stated that in respect of any process or procedure prescribed in Chapter XII, any reference to electronic filing of an application, intimation, reply, declaration, statement or electronic issuance of a notice, order or certificate on the common portal shall, in respect of that process or procedure, include the manual filing of the said application, intimation, reply, declaration, statement or issuance of the said notice, order or certificate in such Forms as appended to the CGST Rules.
- Further Circular No 25/25/2017 GST dated 21.12.2017 clarified that an application for obtaining an advance ruling under section 97(1) of the CGST Act and the rules made there under, shall be made in quadruplicate, in FORM GST ARA-01.
- Although the application shall be filed manually till the advance ruling module is made available on the common portal, the fee is required to be deposited online in terms of section 49 of the CGST Act.
- Hence, AAAR did not find any merit in the argument of the Appellant that the date of application should be the date of online submission. The lower Authority was correct in adopting the manual filing date as the date of application.
Observations of the AAAR with regards to the time period within which the lower Authority was required to pass the order
- Section 98(6) of the CGST Act stipulated that the Authority shall pronounce its advance ruling in writing within 90 days from the date of receipt of application.
- In this case, the application was filed manually on 6th December 2019 and the ruling should have been pronounced on or before 5th March 2020.
- No doubt the ruling given by the Authority was passed after the time period stipulated under the statute.
- However, that did not render the ruling null and void or unsustainable.
- An order which was passed without jurisdiction could be held to be null and void and unsustainable. However, an order suffering from illegality or irregularity of procedure cannot be termed in executable.
- The remedy of a person aggrieved by such an order was to have it set aside in a duly constituted legal proceeding or by a superior court failing which he must obey the order.
- An order passed by a court of competent jurisdiction cannot be deprived of its efficacy by any collateral attack.
- In this case, the Authority was well within its jurisdiction to pass a ruling on the subject matter. Not adhering to the time limit in passing an order can be termed as an irregularity in procedure which could be set right in appeal proceedings.
AAAR thus upheld the ruling passes by the AAR.
In conclusion, if a taxpayer has constructed a building with the intention of providing hostel accommodation which is more akin to sociable accommodation rather than what is commonly understood as residential accommodation, then the impugned property cannot be termed as “residential dwelling”. Once the impugned property is not a residential dwelling, the exemption under Sl.No 13 of Notification No 09/2017 IT (Rate) dt 28.06.2017 will not apply to the renting/leasing of such property. The lessors will have to charge GST while issuing the invoice for the lease services to the lessee, provided they are registered under the GST Act.