Since the implementation of the GST, the taxation system in various sectors has become much more simple and structured. The impact of GST bill on real estate sector has been multi-fold. Every process is set to become more streamlined. We have already discussed the deductions that are applicable to rental income (You can read more on that here). When it comes to commercial properties, GST will also have to be paid on the rental income.
As per the rules of Schedule 2 of the Goods and Services Tax Act, renting out an immovable property will be considered a supply of services and treated as such. GST at a rate of 18% has to be paid on all properties rented out for commercial purposes. However, the threshold for applicability of GST has been increased to ₹20 lakh. Under the service tax regime, the limit was ₹10 lakh. Therefore, many landlords whose annual income lies between ₹10 lakh- ₹20 lakh will now be exempt from paying GST.
For landlords who are renting out their property for commercial purposes and earning more than ₹20 lakh per year, registration under GST is mandatory. If you are liable to pay GST, you must complete the entire registration process and obtain a certificate. Moreover, the registration is required according to the location of the property itself and not the owner. If a resident of Mumbai owns a property in Delhi and rents it out for commercial use, he/she must obtain a registration certificate from Delhi and not Maharashtra.
Let us look at another example:
Satish is a resident of Chennai and owns property in Mumbai and Delhi. Both of these properties have been rented out for commercial purposes. For the property in Mumbai, he receives ₹2,00,000 per month. For the property in Delhi, he receives ₹1,00,000 a month. What is his tax liability under GST on commercial property?
The laws of GST state that the exemption limit has to be considered on a Pan India basis rather than on an individual basis. Since Satish’s total annual income from commercial properties is more than ₹20 lakh [(₹2 lakh+ ₹1 lakh) x 12 = ₹36 lakh], he has to pay 18% GST on the rental income. Moreover, he will have to obtain registration from both Maharashtra and Delhi.
There has been much speculation about the positive and negative effects of GST on commercial property. Many believe the GST burden will incentivize builders to focus on residential properties rather than commercial ones. Since it is expected that rents will increase due to the high GST on commercial property, business houses would also prefer to own their premises rather than rent them. On the other hand, many people may try to take advantage of the loopholes and split ownership and rents so as to below the limit of 20 lakh per year. Such schemes always come up in case of changes in taxation rules.