GST Liability on Residential Property Rented for Commercial Use: AAR Rajasthan’s Ruling

In a significant ruling, the Authority for Advance Ruling (AAR), Rajasthan, addressed the complex issue of Goods and Services Tax (GST) liability concerning the leasing of residential property for commercial purposes. This ruling, documented in Advance Ruling No. RAJ/AAR/2023-24/14 on November 29, 2023, specifically involved M/s. Deepak Jain and Back Office IT Solution Pvt. Ltd.

Background: M/s. Deepak Jain, a practicing Chartered Accountant, not registered under the GST Act, co-owns a property in Jaipur referred to as “the Premises.” The Jaipur Development Authority designates the land use of the Premises as residential. However, a lease agreement with Back Office IT Solution Pvt. Ltd., a GST-registered entity, outlines the exclusive commercial use of the Premises.

Key Issue: The pivotal question before the AAR was whether the Lessor (M/s. Deepak Jain) is obligated to pay GST on a forward charge basis when renting out a residential property for commercial purposes.

AAR’s Determination: The AAR’s findings in Advance Ruling No. RAJ/AAR/2023-24/14 are summarized as follows:

1. Nature of Premises: The AAR deliberated on whether the Premises fell within the definition of residential dwelling according to Notification No. 05/2022-Central Tax (Rate) dated July 13, 2022. Despite the Authority’s confirmation that the land use designated by the Jaipur Development Authority remained residential, the AAR maintained that, due to its commercial utilization, the Premises could not be considered residential for the purposes of the Notification.
2. Taxable Supply and Rate: It was observed that the supply of services, specifically the renting of the Premises for commercial use, falls under SAC 997212 and attracts a GST rate of 18 percent. The AAR opined that the Lessor is obligated to discharge this GST liability on a forward charge basis.
3. Reverse Charge Mechanism Exemption: Importantly, the AAR clarified that the Applicant (Lessor) is not required to fulfill GST obligations under the Reverse Charge Mechanism, as stipulated in the Notification’s terms.
4. Premises Classification: The AAR ruled definitively that the Premises does not qualify as a residential dwelling as per the Notification’s criteria.
5. Determining Residential Nature: Emphasizing the importance of considering the purpose for which the premises are used and the intended users’ length of stay, the AAR underscored these factors as crucial in determining the nature of the Premises—whether residential or not.

Conclusion: In conclusion, the AAR’s ruling in the case of M/s. Deepak Jain establishes a precedent regarding the GST liability of Lessors renting residential properties for commercial purposes. The decision reinforces the significance of actual usage over designated land use, shedding light on the dynamic interplay between legal classifications and real-world applications in the realm of GST taxation.