Recently, the GST rules for letting out commercial premises have now changed. Therefore, it is important that landlords and tenants stay aware of their tax obligations. Earlier, landlords generally paid GST on rental income. However, in certain cases, the Reverse Charge Mechanism (RCM) shifts the GST liability to the tenant. If you have a shop, office, warehouse or any other commercial property for your business, then you must have knowledge about GST on Commercial Property Rent. Following to these rules will ensure that you are compliant and shall avoid penalties.
What is Reverse Charge Mechanism (RCM)?
The GST is normally paid to the government by the service provider. In the Reverse Charge Mechanism (RCM), this liability is on the service receiver.
In simpler terms:
| Normal GST | Under RCM |
| Landlord pays GST | Tenant pays GST |
| Landlord issues GST invoice | Tenant deposits GST directly |
| Forward Charge applies | Reverse Charge applies |
Rules for GST on Commercial Property Rent Under RCM
These are the most important rules that must be followed:
- The application of RCM is only possible in selected instances: Reverse Charge Mechanism would be applied if:
-
- Landlords are not registered under GST.
- Property is rented out for commercial purposes.
- The tenant is GST registered.
- The GST is now payable by the tenant: It means that GST registered tenants now make payments for commercial property rent directly to the government.
- GST rate: GST rate on rent of commercial property continues at 18%.
- You may still need to register for GST: Many landlords perceive RCM as a removal of the requirement for GST Registration. That’s not always the case. However, if the landlord’s taxable turnover exceeds the threshold limit (generally ₹20 lakh for service providers in most of the states), GST Registration may be compulsory.
- RCM does not affect registration threshold: RCM just transmits the GST burden. It does not automatically nullify the legal requirement of GST Registration on crossing the turnover limit.
- Maintain good records: The landlord and tenant both should keep,
- Rental agreements
- Rental invoices
- GST Payment Records
- Financial papers
These will assist in GST audit and compliance checks.
Conclusion
The new rules of GST on Commercial Property Rent have altered the GST liability on certain Commercial rental transactions. If the landlord is not registered under GST and gives the commercial property to a business with GST Registration then the tenant would have to pay GST under RCM.
But Landlords should not be under the impression that RCM is a permanent antidote to the need of GST Registration. The obligations to register may still arise even where the turnover is above the prescribed limit. This knowledge of provisions will help landlords and tenants to be compliant and avoid tax disputes in the future.
FAQs
Q1. Is GST under RCM eligible for claiming Input Tax Credit (ITC) for GST registered tenant?
Yes, the Input Tax Credit (ITC) will be applicable if the tenant is GST registered and the property is utilized for business purposes and if all the other conditions of GST are fulfilled.
Q2. Who is liable to pay GST under RCM?
If an unregistered landlord is letting out the commercial property to a tenant having GST Registration, then the tenant pays GST under RCM.
Q3. Are landlords required to be GST-registered?
In case RCM is applicable then generally Landlord would be required to take GST Registration, if the taxable turnover of Landlord exceeds the threshold limit prescribed.
Q4. Is RCM applicable on all commercial rental transactions?
No. It is applicable only if the landlord and tenant are not registered and the tenant has GST Registration only.
Q5. What is the GST Rate on Rent of Commercial Property?
GST on Commercial Property Rent is charged at 18%.
Moreover, if you want any other guidance relating to GST on Commercial Property Rent, please feel free to talk to our business advisors at 8881-069-069.
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