Renting of residential dwelling
Any person
Any Registered person
Prior to 18th July 2022, renting of residential dwelling for use as residence was exempt under Entry No. 12 of Notification No. 12/2017-CTR, regardless of whether the recipient was registered or unregistered. This led to many businesses availing residential properties in the name of the firm (e.g., for housing employees or directors) without attracting GST.
To plug this revenue leakage, the exemption entry was amended to restrict its benefit only to unregistered recipients, and Entry No. 5AA was inserted to impose RCM where the residential dwelling is rented to a registered person. The rationale is that residential use by a business entity should not escape GST, especially when it is used in the course of business or employment benefit.
Key Points of Interpretation
- The supplier can be any person - individual, firm, company, society, etc., and need not be registered.
- The property must be classified as a "residential dwelling" - a term not defined under the GST Act but interpreted to mean a building or part thereof intended for use as residence (clarified through case law and pre- GST jurisprudence).
- If the recipient is registered, and the property is a residential dwelling, GST will be payable by the recipient under RCM, even if the purpose is residential.
- The tax rate is 18% under SAC 9963 (rental services of residential property)
RCM Applies
A landlord (unregistered individual) rents a flat to XYZ Pvt. Ltd., which uses it to accommodate a director. Since XYZ Pvt. Ltd. is registered, it must pay GST under RCM, even if the purpose is residential.
RCM Not Applicable
A flat is rented by a landlord to Mr. A, an unregistered individual for personal residence. In this case, the transaction remains exempt, as per Entry No. 12 of Notification No. 12/2017-CTR.
Commercial Property Rented to Registered Person
If the property is not a residential dwelling (e.g., commercial office space), then RCM under Entry 5AA is not applicable. The transaction may attract GST under forward charge or Entry No. 5A if the lessor is the government or entry no 5AB.
Although Entry No. 5AA of Notification No. 13/2017-CTR imposes GST liability on the registered recipient when a residential dwelling is rented, it is critical to understand that RCM applies only when such rental service is received "in the course or furtherance of business." This principle flows from Section 9(3) of the CGST Act, which empowers the government to notify specific categories of taxable supplies of goods or services received by a registered person in the course or furtherance of business on which tax shall be paid under reverse charge.
Hence, merely being a registered person does not automatically attract RCM under Entry 5AA. What matters is whether the renting of the residential dwelling is connected to business activities.
Use of residential property may be said to be in furtherance of business in cases such as :-
- Accommodation provided to employees as part of employment contract,
- Guest houses maintained by the company for business visitors or travelling staff,
- Director's accommodation paid for by the company under service conditions,
- Long-term leased flats for senior staff as part of compensation structure.
In all such scenarios, GST under RCM would apply, as the lease is tied to the conduct of the recipient's business.
- If a registered person rents a residential dwelling for purely personal use (e.g., renting a home for personal residence or for relatives), and such lease has no nexus with business, then arguably :-
- The service is not received in the course or furtherance of business, and
- RCM should not apply, since the conditions of Section 9(3) are not satisfied.
In such cases, the burden is on the recipient to establish that the rental has no connection with business and was used purely for private purposes. However, if the invoice is in the name of the business or rent is paid from business accounts, the department may presume business connection unless evidence is to the contrary.