GST rules need tenants to pay 18% tax on leased commercial properties

11 Oct 2024 CW Team

Starting October 10, 2024, the GST department has introduced new rules impacting tenants leasing commercial properties. Under the new regulations, if the property owner is not registered under GST but the tenant is, the tenant must pay 18% GST through the reverse charge mechanism (RCM).

This rule could pose challenges for tenants under the composition scheme, such as small restaurants, as they will have to pay GST without being able to claim input tax credit (ITC), potentially increasing their working capital needs.

Chartered accountant Karim Lakhani explained that typically, property owners registered under GST collect and pay GST to the government under the forward charge mechanism (FCM). However, under the new rules, tenants must now pay 18% GST under RCM if the owner is not registered but the tenant is. Regular taxpayers can claim ITC, but those under the composition scheme cannot.

The composition scheme is available to small taxpayers with an annual turnover of less than Rs 7.5 million, and they cannot claim ITC on their expenses. This could result in higher costs for small manufacturers, traders, and service providers who lease commercial properties.

The rules do not apply if neither the tenant nor the owner is registered under GST. However, if both are registered, or if only the owner is registered, the GST follows the FCM, where the owner collects and pays the tax.

With most property owners unregistered, tenants will need to handle their RCM liability through cash or cheque, as they cannot use their ITC balance for these payments, added Lakhani.

(ET)

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