What is GST on Commercial Rent?
Under the GST regime, renting commercial property is considered a supply of services. Therefore, it is taxable under GST (Goods and Services Tax Act), depending on the location of the property and the parties involved.
The key difference lies in the property type:
- Renting residential property for personal use is exempt from GST.
- Renting commercial property for business use is taxable.
Who is Liable to Pay GST?
This is where most confusion happens. The liability isn’t fixed; it shifts based on the GST registration status of the landlord and tenant. Here’s your simple cheat sheet:
Scenario 1: Landlord is GST Registered
If the landlord is registered under GST (typically due to exceeding the threshold turnover of ₹20 lakhs/₹10 lakhs), they must:
- Charge GST on the rent.
- Issue a tax invoice to the tenant.
- File periodic GST returns and deposit the collected gst.
Scenario 2: Landlord is NOT GST Registered, but Tenant is
This is a critical “reverse charge” scenario. If the landlord is unregistered and the tenant is registered under GST, the liability to pay GST shifts to the tenant.
- The tenant must pay GST directly to the government under Reverse Charge Mechanism (RCM).
- The tenant can then claim this GST as an Input Tax Credit (ITC), subject to usual rules.
- The landlord receives the rent amount without deducting tax.
Scenario 3: Both Parties are Unregistered
If neither landlord nor tenant is GST registered, GST does not apply. However, the annual rental turnover threshold (₹20 lakhs) must be monitored by the landlord.
Pro Tip: Discuss GST responsibility upfront in the rental agreement. A clause stating “Monthly rent is ₹10,000 plus applicable GST” provides clarity and prevents disputes.
Current GST Rate on Commercial Rent
The standard GST rate applicable on renting commercial property is 18%.
Breakdown:
- CGST: 9%
- SGST: 9% (for intra-state lease)
- IGST: 18% (for inter-state lease, e.g., landlord in Delhi, tenant’s business location in Haryana)
Note: This 18% is applied on the rental value. Other charges like maintenance, electricity, and water may have separate GST implications if billed separately.
GST on Renting of Commercial Properties – Important GST amendment w.e.f. 10.10.2024
Applicability of Reverse Charge Mechanism (RCM) on Renting of Commercial Properties
Introduction:
Effective October 10, 2024, important changes have been implemented regarding the GST on commercial property rentals.
The Government of India has issued Notification No. 09/2024 – Central Tax (Rate) dated October 8, 2024, further amending Notification No. 13/2017 – Central Tax (Rate) regarding the applicability of GST under the Reverse Charge Mechanism (RCM) for the renting of commercial properties.
This notification introduces a new entry, 5AB, which mandates that Services by way of renting of any property other than a residential dwelling by any unregistered person to any registered person will now be covered under the RCM.
This notification shall come into force with effect from the 10th day of October 2024
Key Changes/Amendement:
Reverse Charge Mechanism (RCM): Previously, unregistered landlords renting out commercial properties were not required to collect or pay GST. Under the new rules, if an unregistered landlord leases a commercial property (shop, office, godowns, etc) to a registered tenant, the responsibility to pay GST shifts to the tenant. The tenant must now calculate and remit the GST directly to the government.
GST Rate: The GST rate for such commercial rentals remains at 18%. Tenants can claim Input Tax Credit (ITC) on the GST paid under RCM, provided the property is used for business purposes.
Therefore, from October 10, 2024, If any unregistered landlord rents a commercial property to a registered tenant, the tenant is responsible for paying GST directly to the government instead of the landlord.
Registered businesses renting from unregistered landlords must ensure to comply with this latest amendment. They must calculate and pay GST themselves under RCM. They can later claim this amount as ITC in their GST returns.
Unregistered landlords don’t need to collect GST but should inform tenants about their responsibility under RCM.
Let’s understand this provision with an Example:
If a tenant rents a commercial space for ₹20,000 per month, then they need to pay 18% GST (₹3600) under RCM to the government. If the property is used for business, the tenant can claim the ₹3600 as ITC.
This change aims to improve compliance and ensure proper GST collection.
Disclaimer: This blog is for informational purposes only and does not constitute professional tax advice. GST laws are subject to change. Please consult a qualified CA or tax consultant for advice specific to your situation.