GST Council Brings Property Commercial Rentals Under Reverse Charge Mechanism: Key Decisions from the 54th Meeting
In a major development concerning the real estate sector, the Goods and Services Tax-GST Council, during its 54th meeting held on September 9, 2024, in New Delhi, introduced new regulations concerning commercial property rentals. The Council decided to bring the renting of commercial property by an unregistered person to a registered person under the Reverse Charge Mechanism with a view to preventing revenue leakage. This shifts the GST liability from the supplier (landlord) to the recipient of the supply (the tenant), marking a pivotal shift in tax compliance for registered taxpayers.
Reverse Charge Mechanism for Renting of Commercial Property
One of the major decisions taken in the 54th meeting of the GST Council was to put the renting of commercial property under Reverse Charge Mechanism. According to RCM, the liability of paying GST no more lies with the landlord but is transferred to the tenant receiving the commercial rental services. This measure has been brought in to avoid revenue leakage since cases of unregistered landlords not paying GST on rental income have proved a challenge.
The reason for this move was explained by Revenue Secretary Sanjay Malhotra as: “Renting of commercial properties brought under reverse charge mechanism.” This move essentially affects those registered people who rent commercial properties from unregistered landlords. Such tenants would have to calculate and pay the tax themselves, instead of depending on their landlord for it.
Registered Taxpayers-Who will be Affected by the Move?
Above variation leads to enhanced compliance for registered taxpayers. Harpreet Singh, Partner, Deloitte India, pointed out the practical implications of this decision: “The decision to bring renting of commercial property from unregistered suppliers under reverse charge will increase compliances for registered taxpayers, as this would require determination of GST liability on all their place of business under lease.”
Hitherto, the tenants used to pay the rent, and the landlord was supposed to file the GST. Under the new rule, the registered businesses are now required to correctly calculate their payable GST on the basis of the rental agreements they have with unregistered landlords. This is very likely to enhance the compliance burden, particularly for those businesses that have multiple tenancies across locations.
Clarification on PLC
Apart from the new regulations for commercial rentals, the GST Council also clarified the tax treatment of PLC, a fee charged by builders for offering prime locations within complexes or buildings. The issue of how PLC is to be taxed has been one of the contentious issues in the industry, with previous rulings offering conflicting interpretations.
The council explained that PLC, when charged together with the consideration for the property construction, constitutes part of a composite supply. The principal supply in such a case is the supply of construction services, and thus the PLC is inextricably linked with it. In that case, PLC shall be liable at the same rate as applicable to construction services. This explanation extends to residential, commercial, and industrial complexes where PLC is charged in addition before issuance of a completion certificate.
The Government elaborated further in the official statement: “To clarify that location charges or Preferential Location Charges (PLC) paid along with the consideration for the construction services of residential/commercial/industrial complex before issuance of completion certificate forms part of composite supply where supply of construction services is the main service and PLC is naturally bundled with it and are eligible for same tax treatment as the main supply that is, construction service.”
Resolution of PLC Taxation Issue
PLC taxation has been a grey area, with different authorities interpreting it differently. The earlier service tax regime viewed construction and PLC as a “bundled service,” so the service tax was levied on one item. However, under the GST regime, there have been adverse Advance Rulings treating the PLC as a distinct service, taxable at 18% rather than 5% or 12%, as is levied on the construction services, depending upon the nature of the project.
Harpreet Singh of Deloitte India explained this issue: “Residential construction is liable to tax at 5% and commercial construction at 12%. The issue around the taxability of PLC was whether it is a distinct service liable to tax at 18%, or is it part of the construction service liable to respective rates of 5% or 12%.”
The latest clarification by the GST Council puts to rest the confusion in PLC taxation. Builders and developers may finally have peace of mind, knowing that PLCs would attract the same tax rate as the principal construction service, finally out of the ambit of uncertainty over possible legal litigation.
The Larger Ramifications of the Decisions of the GST Council
The 54th meeting of the GST Council, chaired by Finance Minister Nirmala Sitharaman, decided to take a key step towards strengthening tax compliance and plugging revenue leakages. It decided that all commercial rentals shall come under RCM, in other words, the liability to pay GST would fall upon the receiver of services even though the landlord is not registered under the GST system. This closes a loophole that has allowed several unregistered landlords to avoid paying any GST on income from renting out.
More importantly, this would clear the clouds around the taxation of PLC with both the builders and buyers knowing how these charges would be treated under the GST framework. For developers, this brings in ease regarding compliance; for buyers, it clears part of the ambiguity pertaining to additional charges when buying a property.
Conclusion
These decisions represent the commitment of the government to iron out compliance issues and areas of misunderstanding found within the current GST system. Shifting the liability of GST on rental receipts of commercial property to tenants under the Reverse Charge Mechanism is a serious step towards plugging revenue leakages, though at the cost of increased compliance requirements for the registered taxpayers. The clarification with respect to Preferential Location Charges puts an end to the long-standing dispute and closes the door for any future litigation, thereby ensuring that PLC would be taxed in line with the construction services it accompanies.
As the real estate sector falls in line with new regulations, it becomes binding on both landlords and tenants to adhere to the revised framework of GST. Builders are relieved that resolution of PLC’s tax treatment has brought clarity and will ensure a smooth functioning in the real estate market. All in all, these changes would lead to more transparency and efficiency in the working of the GST system and thus be beneficial for the overall economy of the country.
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