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June 5, 2020

Is GST chargeable when property is rent out to a commercial entity for residential purpose

Is GST chargeable when property is rent out to a commercial entity for residential purpose


Services by way of renting of residential dwelling for use as residence, is exempted from the liability of GST under Entry No 12 of Notification No. 12/2017- Central Tax (Rate). For instance, Mr. A owns two house properties. The first property was let out to Mr. X, who uses the same for his residential purposes. While the second property, was let out to Mr. Y who uses the same as an outlet for selling his goods (commercial purpose).

As per GST provisions the rental income will be treated as below:-

  1. Rent received from X – Exempt (no GST)
  2. Rent received from Y – Taxable under GST

Are the provisions of this exemption notification available when property was rent out to a commercial entity for residential purposes?

Let us understand the same by referring to a ruling passed by Authority of Advance Ruling in the case of Borbheta Estate Pvt Ltd.

Facts of the case

  1. The Applicant was renting dwelling units.
  2. Ruling was sought on whether he is liable to pay GST on the supply of renting dwelling units even if the recipient is using the dwelling unit for residential purpose.

Submissions by the applicant

  1. The Applicant, according to the Written Submission made at the time of hearing, has executed agreements for leasing/renting of four dwelling units it owns at different locations in Kolkata.
  2. According to the agreements, all of these units are to be used for residential purpose.
  3. One unit of the total four units has been rented to a commercial entity.
  4. The Applicant argues that he is not liable to pay tax on leasing or renting of these dwelling units, as they are all let out for residential purpose and services by way of renting of dwelling units for residence is exempted.

Submission by Revenue

  1. Revenue stated that provisions under Exemption Notification apply to renting of dwelling units for residential purpose.
  2. Such exemption will not be available when the dwelling unit is rented to a commercial entity.

Observations of AAR

  1. Dwelling units rented to individuals, as described in the relevant contracts, are meant for residential accommodation.
  2. The dwelling unit rented to the commercial entity is a flat in the housing complex.
  3. The Apartment Owners’ Association certified that the Applicant owns the flat and it is a residential flat and cannot be used for any other purpose.
  4. The said association further confirms that an employee of the commercial is staying at the flat.
  5. The Applicant’s service is classifiable as rental or leasing service involving own/leased residential property
  6. The Exemption Notification depends upon whether the dwelling unit is used as residence.
  7. From documents produced it was observed that all the dwelling units were being used for residence, irrespective of whether they are let out to individuals or a commercial entity.

Therefore, it was ruled that the supply of providing dwelling units on rent is exempted (i.e. no GST) under Entry No 12 of Notification No. 12/2017- Central Tax (Rate), as the units are being rented for residential purposes. It is irrelevant if the entity renting the property is a commercial entity. The purpose for which the residential unit is utilized is essential for claiming exemption.

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