Is exemption from GST available to a lessor when his leased property is rented out for residential purpose?

Is exemption from GST available to a lessor when his leased property is rented out for residential purpose?

Introduction

Schedule II of CGST Act lists down the activities to be treated as supply of goods or supply of services. According to Entry 2(b) of Schedule II, any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, is a supply of service.

Entry 13 of Notification No. 9/2017-Integrated Tax (Rate) provides that services by way of renting of residential dwelling for use as residence are exempt from GST.

Is this exemption available if building is leased and the lessee lets out the property as residential accommodation to students on long term basis?

A similar issue was raised in the case of Shri Taghar Vasudeva (applicant-lessor) who had sought an Advance Ruling to find out if exemption prescribed under Entry number 13 of Notification No. 9/2017-Integrated Tax (Rate) can be sought if the building leased is used for residential purposes? Is the lessor required to charge GST while issuing the invoice for the lease service to the lessee?

Facts of the Case

1. The applicant along with four others collectively has let out a Residential complex to who is engaged in the business of providing affordable residential accommodation to students on a long term basis (starting from 3 to 11 months).
2. Along with such accommodation, the lessee is also engaged in providing a host of other services such as maintenance, food, Wi-Fi etc. generally called as a Paying Guest Accommodation.
3. The applicant contends that “renting of immovable property” is covered under Schedule II of CGST Act 2017 which defines it as the supply of services on which the applicable GST rate is 18%.
4. The lessee 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.
5. Thereby, lessee has concluded that the rental accommodation services provided by lessee to the students will not attract GST as the same is exempted under Entry 13 of Notification No. 9/2017-Integrated Tax (Rate)
6. Consequently, there would be no GST obligation on lessee in case of lease arrangement with their lessor too. Therefore, lessee is of the opinion that the applicant should not charge GST to lessee when issuing the invoice for the lease service.

Findings and Discussions

1. The copy of the lease deed shows that the lessors have collectively leased out their premises to the Lessee-Company by way of a single agreement. Each of the lessors owns a part of the property and they have pooled up their properties and then leased it to the Company.
2. The terms and conditions for the transaction are common and the agreement is for the entire property.
3. The lease contract is for the entire property and the lessors have pooled their individual properties into a single one and then given the same as a single piece, and even the sharing of the rent is only an apportionment of the common income.
4. 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. All the terms and conditions are applicable to the total property and the lessee deals with the total property only.
5. Regarding the nature of the transaction, it is seen from the agreement that lessors are providing the service of leasing / renting of the immovable property for a consideration. The reasons are as under:-

i. This is in the course or furtherance of business and hence the transaction between the lessor and the Company would constitute a “supply of service” as per entry 2(b) of the Schedule II to the CGST Act, 2017.

ii. Hence the lessor is providing services of leasing of a building for business or commerce to the Company.

iii. Since, the applicant is not providing service to the lessee, 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 and the transaction between the individuals and the Group are a different transactions, as the individuals are distinct from the Group of Individuals.

iv. It is suffice here only to rule that the question of charging or not charging GST for the transaction between the applicant and the Lessee-Company does not arise as the applicant himself is not effecting any supply of service to the Company directly.

6. Entry 13 of Notification No. 9/2017-Integrated Tax (Rate), is related to “renting of residential dwelling “for use as residence”.

7. The contract of the applicant group with the Company was verified and it was found that the immovable property consists of only rooms with attached toilets which does not fit into the meaning of a dwelling/house.

8. They are like hotel rooms which cannot be termed as a residential dwelling.

9. Even if the same is given for residential purposes, the services provided are not for use as residence by the lessee. Services by a hotel, inn, guest house, club site or campsite, by whatever name called, or other commercial places for residential or lodging purposes are covered by different entries in the schedule of this notification or under different notifications.

10. Rooms though given on rent for residential purposes would not amount to residential dwelling and hence the entry is not applicable for the transaction of the lessor with the lessee.

The AAR ruled that the exemption prescribed under entry no. 13 of Notification No. 9/2017 -Integrated tax (Rate) cannot be sought and the lessors have to charge GST while issuing the invoice for the lease services to the lessee as the property which was let out by the lessee could not be considered as a residential dwelling.

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