The Goods and Services Tax (GST) Council’s decision to bring renting of commercial property under the Reverse Charge Mechanism (RCM) is likely to improve the government’s tax revenue but may prove costly for tenants, according to industry experts.
“This significant policy shift places the GST payment responsibility on tenants, enhancing government GST collection and marking a notable advancement in commercial property rental regulations,” said Ankit Kansal, managing director at 360 Realtors.
On September 9, the 54th GST Council announced that if a person who is not GST-registered rents out their commercial property to a registered person, the rent would attract GST under RCM. Earlier, no GST was applicable in such cases.
The GST at 18 per cent was applicable if the landlord was a registered entity. It was also the case when the residential property was being used for commercial purposes.
According to Shrinivas Rao, FRICS, chief executive officer at Vestian, the earlier mechanism caused “significant revenue leakage for the government”.
“To stop the revenue leakage and widen the purview, the GST Council included this under RCM, which may increase compliance for GST-registered tenants,” he said.
“This move helps the government to increase the tax revenue by making the renting of any property taxable if used for business purposes, irrespective of the owner of the property being registered or unregistered in GST,” said Harsh Bhuta, partner at chartered accountants firm Bhuta Shah and Co LLP.
Saurabh Agarwal, tax partner at EY India, added that it would “streamline tax compliance and provide relief to businesses across sectors”.
However, this would also mean an increased burden on the tenant.
Typically, in a standard GST framework, the supplier of the goods or services is responsible for charging and collecting GST from the buyer and then remitting it to the government. However, under RCM, the recipient becomes liable to pay the GST directly to the government. In this case, it would be the tenant.
“The tenants of these properties would now need to pay higher GST. It is good for the landlord as well as the Centre, but tenants will have to bear the brunt,” a senior official at a real estate consultancy said on condition of anonymity.
The rate for this has not been announced yet, but industry sources say it is likely to be 18 per cent.
The person cited above added, “It would bring tax parity if an 18 per cent rate is announced.”
First Published: Sep 10 2024 | 6:01 PM IST
