Inclusion of Property tax in the Rental Value for levy of GST – GST AAR Karnataka
by ReinHeads Team | Sep 26, 2020
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AAR Karnataka* – Inclusion of Property tax in the Rental Value for levy of GST
| Facts |
- Midcon Polymers Pvt Ltd (‘the Applicant’) proposed to engage in the business of renting of commercial property and allied business
- The Applicant intends to rent its commercial premise to an Educational Institution (‘the Service Recipient’) for a monthly rent of INR 1.50 lakhs (i.e. INR 18 lakhs annually) with a security deposit
- The Applicant contended that:
- Security deposit collected by the Applicant would be refunded without interest on termination of the tenancy and hence shall not form part of the rental turnover;
- Property tax and statutory taxes levied by Bruhut Bengaluru Mahanagar Palike (‘BBMP’) would be paid by the Applicant and claimed as deduction from the value of rental receipt for computing GST;
- Taxable turnover would be limited to the activity of leasing commercial space which is less than INR 20 Lakhs and hence would be exempt from GST registration under the Central Goods and Service Act, 2017 (‘the ÇGST Act, 2017’)
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| Issue before the AAR |
- Whether the Applicant can seek deduction of Property taxes and other statutory levies for the purpose of arriving at the value of rental income?
- Whether notional interest on the security deposit should be taken into consideration for the purposes of arriving at total income from rental?
- Whether the Applicant is entitled for an exemption of tax under the general exemption of INR 20 lakhs?
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| Discussion and Findings of the AAR |
- Property tax is not deductible from the value of taxable supply of renting of commercial premise on account of following:
- Section 15(2) of the CGST Act, 2017 provides that any taxes, duties, cesses, fees and charges, levied under any law for the time being in force, shall be included in the value of taxable supply. However, taxes, duties and cesses levied under the GST legislation shall be excluded from the value of supply, if charged separately by the supplier;
- In the instant case, Property tax is levied under the Karnataka Municipalities Act, 1969 by the BBMP and accordingly the same shall be included in the value of supply under Section 15;
- The Applicant and the Service Recipient are not related and price is the sole consideration (i.e., rental amount). Accordingly, such statutory levies and Property tax shall be included in the value of taxable supply of renting of commercial premise for computing GST thereon
- Security deposit collected from the Service Recipient is a guarantee against damage to property and is an interest free refundable deposit to be returned post expiration of lease period. Such security deposit cannot be considered as consideration for the supply of renting of immovable property. However, if such deposit is withheld by the Applicant due to any damages etc. to the property, the same shall be liable to GST
- Notional interest on security deposit shall be taken into consideration for the purpose of arriving at total rental income only if such interest influences the value of supply of renting service of commercial premise (i.e., monthly rent)
- The Applicant shall be entitled to exemption for registration under GST if the annual total turnover (i.e., monthly rent and notional interest, if it influences the value of supply) does not exceed the threshold limit of INR 20 lakhs
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*Advance Ruling No. KAR ADRG 48/2020 dated 16 September 2020 (The Authority for Advance Ruling, Karnataka) |
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