The latest notice announced by the GST Council changed how the rental income from commercial property is taxed. This change is expected to increase the government’s tax revenue. However, experts say it may raise costs for tenants.
After the Council’s 54th meeting on September 9, it was announced that if the property owner is not registered with the GST, the tenant will be required to pay the GST under the reverse charge mechanism (RCM). This means that the tenant, not the owner, has to deposit the fee. Let’s see the matter in detail.
Understand Reverse Charge Mechanism (RCM)
As per the Reverse Charge Mechanism (RCM), it’s the recipient of the supply of goods or services who is liable to pay the GST. Not on the supplier.
Under the RCM, it’s the tenant who has the responsibility to pay the GST tax sometimes. This simplifies the process of commercial property tax compliance. It has a direct impact on tax remittance and credits, ensuring businesses stay informed about the updated GST regulations.
This simply means that the GST has to be collected and paid by the tenant/lessee, over the landlord. The idea was floated to ease tax collection and increase compliance in sectors where it is difficult to trace suppliers ( Eg. property rental).
Earlier GST Policy on Renting of Commercial Property
The previous standard procedure was that GST would be collected by the landlord/property owner from the tenant’s rent and then deposited to the government every month by GST return filing.
Under this rule, you can rent out commercial properties like shops, cafes, offices and factories; etc. The GST tax rate on such property rentals is 18%.
The landlord/ owner was solely responsible for managing and filing compliance, registration and further tax documents. If the total annual rental of a landlord is above ₹20 lakh, he has to apply for GST registration and charge 18% extra equivalent as advance GST from his tenants.
But the older system created problems when the party would try to enforce these rules— like a person holding the title for their home or small business without proper documentation. Those companies who fail to carry out the due process of GST registration, filing and collections may likely delay tax remittance dues which causes non-compliance of the GST.
Propose Change in GST Policy on Renting of Commercial Property
After the implementation of the Reverse Charge on Renting of Commercial Property, owners do not need to collect and pay GST to the government on rental income. Tenants will directly pay 18% GST on rental to the government and claim ITC in the same month’s GST return filing.
Implications of RCM on Businesses and Tenants
The Reverse Charge Mechanism (RCM) shifts the GST liability from owner to tenant, affecting rental transactions in various ways:
For Property Owner: No headache of collecting and depositing GST every month. Tax liability is shifted to the tenant.
For Tenant: Tenants will directly pay GST and claim Input Tax Credit in the same month GST return filing. It will give safety sense to the tenant while claiming ITC error-free. Because sometimes owners make errors or delays in GST return filing which causes failure in claiming ITC by the tenant.
For Government: Earlier landlords having annual rental income below INR 20 Lakh are exempt for GST. However, in the case of RCM, the applicability of the GST burden passes to tenants who need to pay GST irrespective of landlord’s annual rental income. This will lead to higher GST collection for the government
Learn More: What Is The Eligibility Criteria For GST Registration?
Conclusion
Navigating GST regulations, especially with recent changes in the reverse charge mechanism, is complex. Whether you’re a tenant or a landlord, understanding your obligations is critical to avoid penalties and optimizing your tax planning.
At E-Startup India, we offer expert guidance and support for businesses looking to stay compliant with evolving GST laws. Whether you need help with GST registration, gst return filing, compliance, or legal advice on commercial property rentals or tax on rental income, our team is here to assist.
You may reach our expert at 8881-069-069. for reliable and efficient gst solutions tailored to your business needs.
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