The Karnataka Authority for Advance Ruling (AAR) in its recent ruling on the application filed by M/s Midcon Polymers Pvt Ltd has adjudged that no deduction towards property taxes is allowed from value of renting of immovable services (RIS). Further notional amount of interest on security deposit would be included in value , only if it influences the monthly rent.
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.
Applicants interpretation of law:
The Applicant submits their interpretation of law that Section 15 of the CGST Act specfies that the value of supply shall include any taxes etc. however there is no specific description of value of service whether it includes property tax paid to the loval authority and whether the same should be taken into consideration.
Further there is no provision to include notional interests under the GST Acts.
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 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.
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.
