New GST Rules for Rent: A Comprehensive Guide

Overview of the New GST Rules (Notification 05/2022)

The Notification No. 05/2022 amends the previous rules under Notification 13/2017-Central Tax (Rate) and introduces a new Entry 5AA under the Reverse Charge Mechanism (RCM). Under these new provisions, residential rental services provided to GST-registered persons are now subject to GST. This marks a shift from the earlier exemption for renting residential properties for residential use, which previously did not attract GST.

GST on Rent of Residential Property: What’s New?

As per the updated notification, the rental of residential properties to GST-registered persons is now taxable under the GST regime. This tax will be applied via the Reverse Charge Mechanism (RCM).

For clarity, under the RCM, the tenant, who is registered under GST, will be liable to pay the applicable GST on the rent. This differs from the traditional Forward Charge Mechanism (FCM), where the landlord is responsible for collecting and paying the tax. If the property is rented to a person who is not registered under GST, no GST is applicable.

Reverse Charge Mechanism (RCM) Explained

In simple terms, the Reverse Charge Mechanism (RCM) means that the tenant (GST-registered person) will pay the GST on the rent, rather than the landlord. This applies specifically when the property is rented to a GST-registered person, regardless of whether the landlord is registered under GST or not. This mechanism ensures that businesses or individuals registered under GST will bear the responsibility for the tax payment, simplifying the process for landlords who may not be registered under GST.

GST Rate and Exemptions

The new rules specify a 18% GST rate on rental services for residential properties rented to GST-registered persons. However, certain exemptions apply:

• Businesses with an annual turnover of less than Rs 40 lakh are exempt from paying GST on rental services.
• Salaried individuals who rent residential properties are also exempt from GST obligations.
• No GST is applicable if both the landlord and the tenant are not registered under GST.

GST Implications for Businesses Renting Residential Property

For businesses, the new GST rules introduce specific implications:

Businesses with aggregate income exceeding Rs 20 lakh per annum must pay GST when renting residential property and are required to follow the Reverse Charge Mechanism. Businesses renting property for employees are exempt from GST obligations under these rules.

Renting Residential Property for Commercial Use

If a residential property is rented for commercial purposes, it is taxable under FCM, irrespective of the GST registration status of the recipient. This means that the landlord, in this case, will be responsible for collecting and remitting the GST.

Key Takeaways and Actionable Steps for Businesses

To stay compliant with the new rules, businesses should:

• Ensure proper GST registration if they are renting properties to GST-registered tenants.
• Understand the Reverse Charge Mechanism (RCM) and adjust their accounting practices accordingly.
• Consult a tax professional to clarify GST applicability on rental income and ensure accurate tax filings.

Conclusion

The introduction of GST on residential rental services to GST-registered persons has significant implications for businesses. By understanding the new Reverse Charge Mechanism and applicable exemptions, businesses can ensure compliance with the latest GST rules.