GST on rent: Has Centre allowed hotels to step on landlords’ toes?

From July 18, tenants of residential houses have been brought within the ambit of GST through the reverse charge mechanism. That is, the tax is payable by the recipient of goods or service i.e., the tenant, as against the norm of the tax being payable by the supplier or service provider.

Notification 05/22 of July 13 issued for this purpose, however, doesn’t fasten this burden on every tenant but only on those who are registered under the GST law — suppliers with annual turnover in excess of Rs 40 lakh and service providers with annual gross receipts in excess of Rs 20 lakh.

The unstated rationale is to hit corporates providing rent-free accommodation to their honchos and other employees. They will have to pay 18% GST on the rent paid for residential houses leased from landlords irrespective of the amount of rent. Landlords, the supposed service providers, would be left severely alone but they could well be caught in the crossfire.

Hotels as permanent abodes

In its wake, corporate tax planners are likely to look for mitigation measures. Already, luxury hotels are the preferred homes of expatriate honchos who don’t mind the resultant addition of 24 per cent of their salary as the value of this perquisite provided by the employer.

It is a win-win for the employer and the hotel. Hotels provide a range of services — attendant, attached bar, laundry, swimming pool, tennis court and other creature comforts — the cost of all which is subsumed by the rent.

It makes sense for a luxury hotel charging a rent of Rs 75,000 a day for a suite to enter into a monthly agreement with the company to please its expat honcho to settle for a monthly rent of Rs 15 lakh. 

To be sure, should it rent the suite on a daily basis, the monthly earnings would be Rs 22.5 lakh. But then, the hospitality industry’s holy-grail is occupancy.  Such pricey suites may not be occupied every day.  So, wisdom lies in entering into a long-term contract, say, for three years, which could be the tenure of the honcho in the company, and settle for Rs 15 lakh a month.

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An identical non-hotel accommodation in an upmarket area, say Golf Links in Delhi, reportedly costs Rs 25 lakh a month sans the services of fawning minions.

Will this now become the norm — the model of providing rent-free accommodation even for lesser mortals i.e., homegrown or desi executives albeit in less prepossessing hotels?

Hotels in the pandemic era were starved of business and suffered from abysmally low occupation. They may be game for long-term arrangements with employers.

Of course, there is going to be no savings in GST because whether you hire accommodation from a hotel or a landlord, the GST has to be paid. But the company will not have to bother about providing the services of domestic servants, gardeners and who-have-you whose services incidentally attract tax separately in the hands of the beneficiary, the employee.

Companies, after all, calculate their costs inclusive of taxes.  GST on small hotels, where the daily room rent of not more than Rs 7,500, is 12% and on big hotels, 18%. Let us say a landlord in an upmarket area has to be paid Rs 1 lakh as rent per month, which gets heightened to Rs 1.12 lakh with GST.  Now, if a similar accommodation is wangled from a hotel for Rs 75,000 a month, i.e., Rs 2,500 per day, it works out cheaper, as the cost to the company including 12% GST is only Rs 84,000.

Small hotels are going to be in great demand (except for the finicky expatriates) as GST on hotel room rent up to Rs 7,500 is only 12% whereas GST on more expensive hotel rooms as well as rent to landlords is 18%.

The moot question, however, is will lesser employees take the additional tax on hotel accommodation in their stride?  The taxable value of hotel accommodation provided by the employer is 24% of salary whereas a less pretentious accommodation provided by a landlord is valued at 15% of the salary or actual rent, whichever is less. They might if a free, albeit modest, breakfast is thrown in by the hotel.

Small businessmen to be hit by GST on rent

A person running a small-scale unit clocking Rs 40 lakh annual turnover, too, is going to be hit by the GST on rent.  He will have to pay 18% GST on the rent for the residential accommodation. Splitting of one’s income is already one of the tricks in the tax armour of businessmen.

For example, a pharmacist, even while functioning from the same roof, issues bills bearing two different names — one his and the other his wife’s. He has successfully split his turnover and by extension his income and successfully avoided tax or minimised it.

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This tendency is going to get a fillip now that GST registration is not exactly a badge of honour but instead an albatross around a businessman’s neck. While medium and big companies cannot shake away the GST registration, a small businessman is going to try and wriggle free of it.

Single-minded obsession with salaried class

What is the government going to achieve at the end of the day by this convoluted exercise of foisting a 18% GST on GST-registered tenants?

The salaried class is the best test-compiler willy-nilly, as it is caught by the pincer of TDS at the actual rates of tax (not ad hoc rates as for others) and the employer virtually functioning as the assessing officer insofar as salary is concerned.

Targeting them vicariously to squeeze more GST from their employers smacks of small thinking and the lack of large ideas to spread the tax net.  Indeed, the relentless pursuit of GST as the tax revenue despite knowing that indirect taxes are regressive leaves the common man with a depressing thought — the government has run out of ideas in gunning after income-tax evaders. One of the hallmarks of a developed nation is a greater share of direct taxes in the tax pie.

RWA too at the receiving end of GST highhandedness

The GST authorities have descended on GST-registered tenants after drawing first blood from Resident Welfare Associations (RWA).  As it is, a RWA has to pay GST of 18% if the monthly maintenance for a particular flat is more than Rs 7,500 a month.

Let us say a building has two types of houses — 1,500 sq ft (small) and 2,000 sq ft (large). Out of 100 flats, 50 are small and 50 large. Let us say the RWA charges Rs 4 per sq ft a month towards maintenance.  It has to pay GST of 18% on Rs 4 lakh every month attributable to its collections from the large flat owners.

The small flat owners, meanwhile, wait with trepidation for their own turn, which could well be the denouement should the tax-free threshold be lowered or the RWA be constrained to hike the per square foot rate beyond the danger mark.

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The Supreme Court has clearly held in a catena of cases that mutual associations are not liable to pay income tax on the rational ground that one cannot make profit from oneself.

An RWA is one such mutual association whose contributors and participants are identical. They are welded together as an association not to make profit but to provide to themselves common services which individually they simply cannot.

For example, you need security at the gates, sweepers, electrician, plumber and gardener to take care of the common areas besides the individual flats.  If an RWA is not liable for income tax, pray tell how it can become liable for GST.

Likewise, a landlord is not a service provider like a hotel.

It is time the government stopped shooting the sitting ducks and plucking low-hanging fruits like fuel tax, demand for which is inelastic. It also needs tutorials or primers on the basics of taxation.

(The writer is a CA by qualification, and writes on business, consumer issues and fiscal laws.)