Is GST applicable on electricity charges recovered from tenants?
Under the provisions of GST, according to Section 15 of CGST Act, the value of a supply of goods and/or services shall be the transaction value, that is the price actually paid or payable for the said supply of goods and/or services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. Inclusions in value og taxable supply are mentioned u/s 15(2):
- Taxes, cess, fees and charges other than tax leviable under GST Act.
- Amount that supplier is liable to pay that was incurred by recipient.
- Incidental expense charged by supplier and anything done in relation of supply to recipient.
- Interest, Late fees or Penalty for delay payment
- Subsidies linked to price excluding government subsidies.
GST has a concept of “pure agent”, under which if you incur an expense while providing a service to your customer, then on satisfaction of all prescribed conditions, you need not pay any GST on the amount you recover over and above your charges in the capacity of pure agent.
In a significant ruling of Gujarat Narmada Valley Fertilizers & Chemicals Ltd, the Gujarat Authority for Advance Ruling (AAR) has said a landlord does not have to pay GST on electricity or incidental charges recovered from tenants, in addition to rent as per lease agreement for renting of immovable property since the said amount would not be includible in the value of supply. Let us refer to the case to understand the same better.
Facts of the Case:
- M/s. Gujarat Narmada Valley Fertilizers & Chemicals Ltd (GNFC or lessor or Applicant) entered into a lease agreement with the President of India acting through the Commissioner of Central Excise (lessee) to provide along with the building for a rent the interior infrastructure like partitions, cabins, work stations, electrical air conditioners, fire safety systems, tables, chairs etc. at agreed monthly rent
- The applicant sought the Advance Rulings on the following questions:
- When landlord charges electricity or incidental charges in additional to rent as per Lease Agreement for immovable property rented to the tenant, is landlord liable to pay and recover GST from tenant on electricity or incidental charges charged by it?
- Can electricity charges paid by landlord to Torrent Power Ltd. (the supplier of electricity) for electricity connection in the name of landlord and recovered based on sub meters from different tenants be considered as amount recovered as pure agent of the tenant when the legal liability to pay electricity bill to Torrent Power Ltd. is that of landlord?
Observations of AAR on whether landlord is liable to pay and recover GST from tenant on electricity or incidental charges charged by it
- The agreement indicated that the applicant had cast an onus on the lessee to pay the charges in respect of the electric power used by them directly to the electricity company.
- Both the lessee and lessor were independent of each other and the applicant had agreed upon to charge the fixed amount towards the supply of services, whereas, the applicant had cast an onus on the lessee to pay the actual electric power charges in respect of the power used by the lessee.
- In view of such an agreement, it could not be said that the electricity charges would be covered by Section 15(2)(c) of the CGST Act, 2017 for the sole reason that the rate for renting of premises has been fixed at an amount and the electricity charges are to be borne by the lessee as per the actual usage of electric power by them in terms of the agreement.
- Accordingly, the said amount would not be includible in the value of supply.
- It was reiterated here that the decision would apply to this specific agreement in as much as the agreement was specific to the effect that the lessee would bear the electricity expenses at actuals and the value of renting of the immovable property was a fixed amount specified in the agreement which becomes the value of supply in terms of the statutory provisions.
Observations of AAR on whether such expenses incurred by the applicant would be considered as charges taken in the capacity of a pure agent or otherwise.
- This question gained importance owing to the fact that the applicant had not provided a separate electric meter to the lessee in the instant case and as such the lessee cannot make the payment of electric charges directly to the electric company.
- In such circumstances the applicant made the payment to the electric company and in-turn collected such charges from the lessee.
- To make the system work, the applicant had installed sub-meters and they collect the charges of the electric power used by the lessee as per the usage of power ascertained from such sub-meter.
- Two aspects emerge from the above scheme of arrangement:
- The applicant has not obtained separate meter from the electric company to facilitate the direct payment of electricity charges by the lessee to the electric company
- In absence of separate meter, the applicant has installed sub-meter and collects the charge of electric power used by the lessee from the lessee and in-turn pays the same to the electricity company
- The above made it amply clear that the lessee was supposed to pay the electricity charges directly to the electric company as per the actual usage in terms of the agreement.
- However, for the failure of the lessor to obtain a separate electric meter for the premises rented to the lessee, they had mutually agreed to collect the electric charges on the basis of actual usage based on the sub-meters and onward payment to the electric company.
- The lessee was Government of India and as such would by no means pay any amount in excess or lower than the actual electric power used by them.
- With a purpose to ensure such actual payment, the lessor i.e., the applicant has installed a sub-meter for the lessee.
- Thus, it was purely a reimbursable expense made by the lessee which was collected on actual usage of the electric power.
- Secondly, if at all the amount was not be charged on actual usage basis, it would have been all the more easier for both the parties to fix a certain amount towards electricity charges in the agreement itself.
- However, this was not done which clarified the intent of both the parties that the charges towards electric power usage would be on actual basis
- The above discussion read with the agreement entered into between the applicant and the Government of India made it expressly clear that the agreement contained an inbuilt clause of actual payment of electric charges by the lessee directly to the electric company.
- However, due to lack of infrastructure on the part of the lessor, there was a silent agreement between both the parties that the applicant would collect the actual usage charges on the basis of the reading of the sub-meter and in-turn pay the same to the electric company.
- Since this arrangement was on-going since such a long time, it could be clearly said that there is a mutual understanding between both the parties and such mutual understanding was also an called an ‘agreement’ in terms of the provisions of the Indian Contract Act, 1852.
- Thus, the conditions of Rule 33 of the CGST Rules, 2017 also stood satisfied in the instant case and as such it is concluded that the electricity expenses incurred by the applicant on behalf of the lessee have been incurred in the capacity of a pure agent.
In conclusion, the electricity charges collected by the applicant is not covered under the provisions of Sec. 15(2)(c) of the CGST Act, 2017 and as such would not be includible in the value of supply. The electricity charges collected by the landlord from the Govt. of India at actuals based on the reading of the sub-meters is covered under the amount recovered as a pure agent in terms of the provisions of Rule 33 of the CGST Rules, 2017 in respect of the lessor viz. Govt. of India.