We all know that Renting of immoveable property services is subject to GST. However residential property when rented for residential use enjoys exemption from GST. While discharging the GST liability on renting services a question may arise as to whether the property tax which is also charged from the tenant will form part of valuation for GST purposes. Further another critical issue is whether security deposit given by tenant will attract GST and further as such security deposit is interest free, whether notional interest on such security deposit will be included in the value of taxable supply i.e. rental value.
For finding answers to above questions we may refer to the recent ruling of the Karnataka Appellate Authority for Advance Ruling (AAAR) in the case of M/s Midcon Polymers Pvt Ltd wherein it has been adjudged that no deduction towards property taxes is allowed from value of renting of immovable services (RIS). Further for the purpose of arriving at the total rental income, the notional interest earned on the security deposit is not to be taken into consideration.
Lets discuss the above Ruling. You can also read / download the complete order for study and future reference.
Facts of the Case:
- The Applicant M/s Midcon Polymers Pvt Ltd, have proposed / planned to engage in the business of renting of commercial property on monthly rents and allied business.
- They intend to enter into a contractual agreement of renting of immovable property with an Educational Institution in Bangalore.
- The contract is on the basis of reserved monthly rent of Rs 1.50 lakhs or annual rent of Rs 18 lakhs and also refundable caution deposit of Rs 500 lakhs, which shall be returned without interest on the termination of tenancy.
- The Applicant discharge the statutory taxes levied by the BBMP and also deposits , which is as per contract.
- The applicant do not have any taxable activity other than the activity of leasing out immoveable property spaces hence are at present claiming exemption since their turnover is less than Rs 20 lakhs.
Issues on which Ruling was sought;
i) For the purpose of arriving at the value of rental income, whether the applicant can seek deduction of property taxes and other statutory levies.
ii) For the purpose of arriving at total income from rental, whether notional interest on the security deposit should be taken into consideration.
iii) Whether the applicant is entitled for exemption of tax under the general exemption of Rs 20 lakhs.
Karnataka AAR Order: Deliberation and Ruling
- It can easily be inferred from Section 15(2) that any taxes , duties, cesses, fees and charges levied under any law shall be included in the value of supply with only exclusions being GST levied under GST Acts , which are charged separately. In the instant case property tax is levied by BBMP. Further as per Section 15(1) of the CGST Act, as the supplier and the recipient are not related, price is the sole consideration of the supply and monthly rent is the price payable. Thus monthly rent is the transaction value and the same would be the value of supply of the impugned service of (Renting of immoveable property services) RIS.
- The Apex Court in the case of Commissioner v. I.S.P.L Industries Ltd 2003(154) E.L.T 3(SC) has held that notional interest on advances taken by the assessee from buyers cannot be added to the assessable value of the goods cleared, unless there is evidence to show that the interest free deposit has influenced the price.
- We conclude that the notional interest has to be considered as part of value of supply of service , if and only if the said notional interest influences the value of supply i.e. value of RIS service / monthly rent and is liable to GST along with monthly rent at the rate applicable to monthly rent.
- We find that Applicant are entitled for the general exemption for registration purpose , subject to the condition that their annual turnover which includes monthly rent and notional interest , if it influences the value of supply, does not exceed the threshold.
In view of above deliberations the bench comprising of Dr. Ravi Prasad M.P and Mashhood Ur Rehman Farooqui gave the following ruling in respect of three issue raised:
- The applicant can’t deduct the property taxes and other statutory levies for the purpose of arriving at the value of rental income.
- The notional interest on the security deposit shall be taken into consideration, for the purposes of arriving at total income from rental, only if it influences the value of RIS service i.e. monthly rent.
- The Applicant is entitled for exemption of tax under the general exemption of Rs 20 lakhs , subject to the condition that their annual turnover which includes monthly rent and notional interest , if it influences the value of supply, does not exceed the threshold limit.
Aggrieved by the order of AAR , the applicant filed an appeal before the Karnataka AAAR.
Order of Karnataka AAAR: Deliberation and Ruling
- All taxes levied under any law in force is to be included in the value of renting of immoveable property service supplied by the Appellant. Therefore property tax paid to the Municipal Authority (BBMP) cannot be deducted from the monthly rental income for arriving at the value of supply.
- The purpose of collecting security deposit in rental services , is to provide a security in case there is default in payment of rent by the lessee or if there is damage to the leased property. Therefore, such security deposit cannot be considered as a consideration for the rental service.
- The interest earned by the supplier from the third person , on account of investing the security deposit amount is not a payment made by the third person ‘in respect of, in response to, or for inducement of the supply of the renting service. There is no connection between payment of interest by the third person and renting service supplied by the supplier to lessee. We disagree with the finding of lower authority on this aspect and hold that the notional interest earned on the security deposit is not to be included in the total rental income.
In view of above deliberations the coram consisting of D.P. Nagendra Kumar and M.S.Srikar held that for the purpose of arriving at the value of rental income, Appellant cannot deduct the amount paid as property tax to the Municipal Authority or any other statutory levies levied under any law for the time being in force, other than the CGST, SGST, IGST and Compensation Cess, subject to the condition that it is charged separately by the Appellant.
The AAAR further held that for the purpose of arriving at the total rental income, the notional interest earned on the security deposit is not to be taken into consideration.
READ / DOWNLOAD ORDER:
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
