Only GST-registered tenants face rent tax

Relax, if you are a salaried employee and have rented a residential flat on rent, the recently introduced rules for charging Goods and Services Tax (GST) under the Self Assessment Mechanism (RCM) on the rent paid.

Until July 17, GST was not applicable on rent/rental collection if the residential property was let to "nobody". Pursuant to the recommendations of the 47th GST Council and the issuance of a notification on July 13, residential immovable properties distributed on lease or lease under certain circumstances are subject to GST.

The new rules state from 18 July that when a "non-registered person" (eg a salaried person or small business owner) lets their flat to a GST "registered person" (eg a company), then GST will be applicable. In terms of the reverse charging mechanism, it is also the tenant who will have to bear the VAT (current rate is 18%) and compliance obligations. The term 'person' under tax laws does not only mean an individual, but is broad and includes all legal entities - including companies.

Salaried individuals do not need a GST record. It is also important to note that not all entrepreneurs, professionals or business entities are required to register. The annual threshold for registration is a turnover of Rs 20 lakh for service providers (say a business consultant) and Rs 40 lakh for a goods supplier (registration limits are lower in northeastern states). However, in many cases even those below the threshold limits get GST registration as it allows their clients/customers to claim supply chain input tax credit.

Since social media is filled with anxious questions, let's look at three different scenarios:

Scenario 1 
Here, a GST registered business consultant rented a flat (from an unregistered individual) for himself and his family. Sunil Gabhawalla, founder of a CA company explains, "I believe the reverse charge mechanism will not be triggered if the rent paid is not declared as an expense by this business advisor in your income tax return."
Some disturbing posts on social media have emerged because working from home has blurred the lines. "If a professional or temporary worker is GST-registered and provides services as a sole trader, it can help reduce any future controversy if he avoids renting out residential property in his own name," adds Gabhawalla.

It should also be remembered that if the tenant does not have to register for GST, the reverse charge mechanism will not apply.

Scenario 2 
A corporate entity leased a residential apartment to its principal employee or director. The owner is an individual without GST registration. In this case, the VAT based on the reverse charge mechanism will have to be paid by the legal entity, which is the lessee. Gabhawalla adds that if the employee has taken the apartment on rent, even if it is fully compensated by the employer, there will be no GST implications on the rent paid.

Finally, if both the landlord and tenant are unregistered parties, the new rules will not apply.

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