The Goods and Services Tax (GST) is a multi-stage, destination-based, comprehensive tax imposed at each stage of value addition. It has successfully assisted the Indian government in achieving its 'One Nation One Tax' agenda by replacing several indirect taxes.

The tax is imposed on goods and services sold for consumption within India's borders. GST, implemented in most countries worldwide with their customizations, has successfully simplified India's indirect taxes structure.

GST is applied to the ultimate market price of goods and services produced in-house, resulting in the maximum retail price. Customers must pay this tax when they buy products or services, included in the final price. It is then needed to be paid to the government by the seller, meaning the indirect incidence.

The Goods and Services Tax (GST) has established a systematic strategy to collecting taxes from diverse sectors. Many people have relied on rent as a source of income over the years. Let us discuss the impact of the GST implementation on rent in this post and if GST differs for commercial and residential buildings.

This article covers a brief introduction of what the GST regime means and how it has impacted the real-estate sector. Further on, we have covered the various aspects of the implication of the GST scheme on rent.

Why was GST introduced?

India's GST laws are significantly stricter than any of the country's previous indirect tax laws. Only invoices uploaded by their suppliers are eligible for an input tax credit under GST. The chances of obtaining input tax credits on fraudulent invoices are significantly reduced in this manner. The emergence of e-invoicing has only strengthened this goal.

GST is primarily technology-driven. All operations, including registration, return filing, refund application, and answer to notice, must be completed online using the GST site, which speeds up the process.

Furthermore, because GST is a national tax with a centralized surveillance system, the crackdown on defaulters is faster and more efficient. As a result, the GST has significantly reduced tax evasion and reduced tax fraud.

The GST has chiefly eliminated the cascading effect on the sale of goods and services. The elimination of the cascade effect has affected the cost of items. The cost of items reduces because the GST regime eliminates the tax on tax.

GST is also primarily technology-driven. All operations, including registration, return filing, refund application, and answer to notice, must be completed online using the GST site, which speeds up the process.

The pre-GST era in India

Before introducing and executing GST, the property owner must register for service tax if the total taxable service exceeds Rs.10 lakhs per year, including rental revenue from all properties. On the other hand, the landlord would not be taxed service tax if his total taxable income from all properties did not exceed Rs. 10 lakhs. Another important criterion was that only business properties rented out would be subject to the 15% service tax.

Even if a home space has been rented out for business use, this would be appropriate. While rental revenue from residential premises was exempt from service tax, rent from commercial properties was subject to the same 15% tax.

Post GST era in India

With the GST regime's bundling of taxes on products and services, there is no longer any uncertainty concerning the levy of distinct taxes on services and goods. Unlike the previous regime, the GST threshold limit has been raised from Rs 10 lakh to Rs 20 lakh. With the adoption of GST, many landlords who were previously covered by the service tax regime will no longer be in the indirect tax net.

It's worth noting that all taxable and exempt products and services will be taken into account when calculating the GST's aggregate ceiling of Rs 20 lakh.

So, unlike the service tax regime, where only taxable services were considered when determining whether you had crossed the primary threshold, under the GST, the value of all services and goods supplied in India, as well as exported, will be considered for the Rs 20-lakh limit, whether taxable or exempt.

In 11 particular category states, the Rs 20 lakh limit is reduced to Rs 10 lakh. Similarly, the total turnover of all supplies made by you would be combined to compute aggregate supplies. In addition, the GST rate on commercial property rentals will be 18 percent. Rental revenue from a residential property, on the other hand, is tax-free.

The GST has one more significant tax effect on commercial property rent. The legislature adopted the concept of a "reverse charge mechanism" from the GST service tax regime.

Unlike the service tax regime, the reverse charge mechanism (RCM) is applicable to services and not extended to the manufacture or sale

of goods. The GST regime makes the exact mechanism applies to both goods and services. As a result, a GST-registered person who receives goods or services from a GST-unregistered person should pay off the GST under the reverse charge mechanism.

There is no provision for a reverse mechanism concerning the rent paid by the lessee under the service tax regime. Because of the increased rate and the charge under the reverse mechanism, the proposed GST requirements will eventually make renting any commercial space more expensive.

What is the impact of GST on rent?

Effect on Buyers:

Previously, buyers of under-construction properties had to pay VAT, Service tax, Registration fees, and Stamp duty. Furthermore, because state levies such as VAT, Registration fees, and Stamp Duty were imposed, property prices differed from one state to the next. Furthermore, contractors were required to pay numerous duties such as sales tax (CST), customs duty, OCTROI, and other fees for which there was no credit available.

Under the GST, properties under construction are subject to a single tax rate of 12 percent, although completed or ready-to-sell properties are not subject to the tax, as was the case previously. As a result, purchasers will benefit from the GST price reductions. In the short term, purchasers may opt for a "wait and see" strategy to learn better about the effect of GST on property prices and postpone purchasing decisions.

Furthermore, if the benefit of the contractor's input tax credit is passed on to the consumer, GST will positively impact customers in the long run.

Previously, contractors had to pay Excise duty, VAT, Customs duty, Entry taxes, and other taxes on raw materials/inputs and Service tax on various input services such as permission costs, architect professional fees, and labor charges, legal charges, and so on. ITC was not accessible for duties such as CST, Customs tax, Entry Tax, etc. This would affect pricing, and the burden would be shifted to the buyer as a result.

Effect on Contractors:

Construction expenses for contractors are considerably lowered under GST due to the subsumption of several taxes and the availability of input tax credit. Additionally, the cost of logistics will be reduced. As a result, contractors' profit margins may improve.

On the flip side, contractors must perform various calculations to arrive at ITC, passing them on to buyers. As a result, they can only pass on the ITC during the final phases in most circumstances. This lack of information on ITC may impact contractors because purchasers may take a "wait and see" approach and postpone purchasing decisions.

Furthermore, under the previous laws, a considerable chunk of expenditure went unrecorded in the books. Under GST, credit availability on inputs and cloud storage of invoices has decreased under expenditure recording.

Effect on Stakeholders:

The impact on associated services such as labor, material suppliers, and service providers is determined by the amount of tax paid on these items and services. This will have ramifications for the real estate industry as a whole. Cement, for example, was formerly taxed at a rate of 27-31 percent but will now be taxed at 18 percent. An increase in cement costs will increase the overall building cost.

How has GST affected the Real- estate segment?

Before diving deep into the impacts of GST on rental properties, let's get clear on a few other aspects related to it. GST and its effect on buyers, stakeholders, and the costs that went through modifications.

One of the most significant cornerstones of the Indian economy is the real estate business. The real estate business generates between 6 and 8% of India's GDP and ranks second in employment generation behind the IT industry. With individual taxes such as service tax and VAT in place earlier, the indirect taxation in this sector has been completely redesigned with the introduction of GST.

With considerable relaxations in some highly competitive parts of the real estate market, such as the rental markets, these segments experienced an increase in investments while others remained relatively constant. GST has proven to be a remarkable amendment in the real estate sector.

Real estate, which was formerly taxed at a rate of 12%, is now taxed at 5%, and real estate titans feel that the consolidation of taxes into a single unit has helped strengthen the sector and speed expansion.

Taxes such as Stamp Duty and Registration costs and others linked with construction supplies remain distinct. GST nonetheless contributes to creating a hybrid taxing system with specific good incentives in this sector. As a result, investments in this sector are increasing, particularly in the Rental Markets, particularly in the case of homes rented for residential reasons.

How to claim GST paid on rent as an input tax credit (ITC)?

GST resulted in a significant shift in the principal method of input credit taxation under GST.

The tax paid by a company on a purchase is used to reduce the tax burden on sale, and this tax is known as the input tax credit. The taxes charged are based on the value contributed at each supply chain step until it reaches the consumer.

The capacity to lower the tax already paid on inputs while paying output tax is referred to as input credit. Assume you're a manufacturer with a final product (output tax) of INR 550. The cost of the purchase (Input Tax) is INR 400. You can claim a Rs 400 Input Credit and pay taxes of Rs 150.

The individual who pays GST on rent can deduct the amount he paid from the GST required to pay. In a nutshell, ITC on GST paid on rent can be claimed if all of the requirements for claiming Input tax credit are met. Take a look at the provisions relating to TDS on commercial property rent. The individual paying rent must pay the GST to the owner of the rented property. This GST will be applied to the rent due under the rental agreement. If the rent for the property is higher than Rs.1.80 lakh per year, the rent payer must deduct income tax at the source (TDS) at a rate of 10%. Failure to do so will result in a penalty.

Reverse Charge Mechanism

The reverse charge mechanism (RCM) applies to certain services that have been notified under the GST Act. The Reverse Charge Mechanism is the procedure of paying GST by the receiver rather than the supplier. The recipient should clear tax under the reverse charge system, but both the provider and the recipient must disclose RCM supply.

Before RCM under GST

The supplier had to record invoice-by-invoice sales subject to RCM. The supplier must declare the same in GSTR-1 table 4B. (Outward supplies engaged tax on reverse charge basis). The recipient is required to report a summary of purchases that are subject to reverse charge. The beneficiary must report in GSTR-3B Table 3.1 (D) (inward supplies liable to reverse charge). While filing his GSTR-3B, the beneficiary must discharge the liability using an electronic cash ledger. The recipient can only use ITC on RCM purchases in the next tax period. He can claim GSTR-3B Table 4A. (eligible ITC).

Post RCM under GST

The summary sales subject to RCM must be reported in GST RET-1 by the supplier. He must disclose external RCM supplies under GST RET-1 Table 3D. (details of supplies having no liability). There is no need to declare RCM sales in GST RET-2 and GST RET-3. In GST ANX-1, the recipient must record invoice-by-invoice purchases generating a reverse charge. He must record this in GST ANX-1 Table 3H. (inward supplies attracting reverse charge).

Inward RCM supplies of the recipient are auto-populated into Table 3B of GST RET-1. When reporting his GST RET-1/PMT-08/RET-2/RET-3, the recipient must discharge his liability using an electronic cash ledger. The RCM credit will be auto-populated in Table 4A of the recipient's GST RET-1 (details of ITC based on auto-population from FORM GST ANX-1).

For reporting RCM supplies, the roles of supplier and recipient will be reversed under the planned new return system.

The supplier transferred the duty for invoice-based reporting of RCM supplies.

The recipient's responsibility for reporting a summary of RCM supplies is transferred to the supplier.

The nature of ANX-1 is the cause for this alteration. Compared to the GSTR-1, it now demands reporting of those supplies where tax liability and discharge falls on the shoulders of the taxpayers. Under both the old and new return systems, the recipient is solely responsible for paying taxes and receiving ITC benefits.

How has RCM impacted GST on Rent?

The notion of RCM was drawn from the former Service tax statute. The scope of RCM has been dramatically enlarged in GST, which may have a negative impact on contractors.

One of the necessary modifications to RCM under the GST law is that if goods or services are obtained from a person not registered under GST, a registered person under GST must pay GST on all such deliveries. Contractors must pay GST on services acquired from goods transporters, legal services received from an individual or corporation, government or local authorities, such as municipalities, and so on (subject to exclusions).

Furthermore, under GST, the contractor cannot offset the RCM tax payable with the input credit received from the GST paid on the inputs. It must instead be paid in cash or via bank transfer.

This raises expenses and has a detrimental impact on contractors, particularly small contractors.

GST on a rented property for commercial purposes

A taxpayer who earns more than the exemption amount must register for GST and pay taxes. As a result, if you have given your property to a business, it is taxable. If you receive more than Rs 20 lakh in rent, you must register for GST.

Suppose a registered charitable or religious trust owns and operates a public religious facility. It is exempt from GST. This is only possible if the following conditions are met: – the rent for these rooms is less than Rs. One thousand per day; – the rent for stores and other commercial spaces is less than Rs 10,000 per month; and – the rent for communal halls or any open area is less than Rs 10,000 per day.

GST will be imposed at 18 percent on the taxable value of all rented business spaces, and rent will be recognized as a taxable supply of service.

How Can Deskera help?

Deskera is an all-in-one software through which you can combine accounting, financial management, inventory management, and many more such features using Deskera Books.

While the taxation regimes followed by most countries tend to be intimidating and nerve-wracking, the key to understanding them is by starting to understand each of their nitty-gritty. In the case of GST in India, this involves understanding the Forms GSTR-1, GSTR-2A, GSTR-2B, GSTR-3B, the difference between GSTR-9 and GSTR-9C, reverse charge mechanism under GST, and many more such details.

Key Takeaways

GST is also heavily reliant on technology. All procedures, including registration, return filing, refund application, and response to a notice, must be conducted online through the GST site, which expedites the process.

With considerable relaxations in some highly competitive parts of the real estate market, such as the rental markets, these segments experienced an increase in investments while others remained relatively constant. GST has been a remarkable reform for the real estate sector.

Furthermore, if the benefit of the contractor's input tax credit is passed on to the consumer, GST will positively impact customers in the long run.

A taxpayer who earns more than the exemption amount must register for GST and pay taxes. For example, GST will be levied at 18 percent on the taxable value of all rented business spaces, and rent will be recognized as a taxable supply of service.