Answer By law4u team
In India, Goods and Services Tax (GST) is a single tax that applies to the supply of goods and services. Commercial lease agreements, like many other services, fall under GST, and both landlords and tenants need to understand how it impacts rental payments and other associated transactions. GST on commercial leases is governed by the provisions under the GST Act, which sets out the rate of tax applicable and how it should be handled.
How Does GST Apply to Commercial Lease Agreements?
1. GST on Rent for Commercial Properties:
GST Applicability: Commercial lease agreements are subject to GST as the renting of commercial property is classified as a taxable supply under the GST Act. The GST is levied on the rent paid by the tenant to the landlord for the use of the commercial property.
GST Rate: As of now, the GST rate on commercial property rental is 18%. This rate applies to the rent charged by the landlord for leasing out commercial property, including office spaces, retail spaces, industrial units, and warehouses.
Tenant's Responsibility: Tenants are responsible for paying the rent along with the applicable GST. The GST is typically charged on the rent amount, and the tenant is required to make payment of the total rent plus GST.
Example: If a commercial property has a rent of ₹50,000 per month, the landlord will charge an additional 18% GST, making the total monthly rent ₹59,000 (₹50,000 + ₹9,000 GST).
2. GST on Security Deposits:
Security Deposit: GST is not applicable on the security deposit paid by the tenant at the time of entering into the lease agreement. The security deposit is considered as an advance or a refundable payment, and since it does not constitute payment for the supply of a service (i.e., it is not rent), it is outside the scope of GST.
Refund of Security Deposit: When the deposit is refunded at the end of the lease period, no GST is applicable to the refund amount.
3. Input Tax Credit (ITC) for Tenants:
Availability of ITC: Tenants who are registered under GST and use the rented commercial property for business purposes can claim Input Tax Credit (ITC) on the GST paid on rent. This means that tenants can deduct the GST paid on their rental payments from the GST they need to remit on their own sales or services.
Conditions for ITC: To claim ITC, the tenant must be engaged in the supply of taxable goods or services. Additionally, the landlord must be registered under GST and issue a valid GST invoice for the rent and GST charged.
Example: If the tenant pays ₹59,000 as rent (₹50,000 rent + ₹9,000 GST), and the tenant is eligible for ITC, they can claim back the ₹9,000 GST as a credit in their GST returns.
4. GST Exemption:
Residential Properties: It is important to note that GST is not applicable on the rent of residential properties. However, if the property is used for commercial purposes (e.g., converted into a serviced apartment or rented out for office space), it becomes subject to GST.
Certain Exemptions: Some small-scale landlords or residential tenants may be exempt from charging GST based on certain thresholds or conditions outlined in the GST law. The exemption limits for landlords (who provide commercial space) and tenants can depend on their turnover.
5. GST on Maintenance Charges:
If the landlord charges separate fees for maintenance services (e.g., for common area maintenance, security, or cleaning), such charges may also be subject to GST at 18%, if the services provided fall under the taxable services category.
In such cases, the landlord should separately state the GST applicable on maintenance fees in the lease agreement, and tenants will be required to pay GST on these charges in addition to the rent.
6. GST on Lease Agreement Amendments:
If there are amendments or changes in the commercial lease agreement that result in a change to the rental amount, the revised rent will be subject to GST at the prevailing rate (currently 18%).
Increased Rent: If the lease term is extended and the rent is revised upwards, the landlord will need to charge GST on the new rent amount.
7. GST on Other Charges:
Any other charges (e.g., parking fees, service charges, or penalty for late rent payment) that form part of the lease agreement may also be subject to GST if they are related to the supply of services.
Example Scenario:
Scenario 1: A tenant rents out a commercial office space for ₹1,00,000 per month. The landlord charges 18% GST on the rent. Therefore, the total rent payable by the tenant is ₹1,18,000 (₹1,00,000 rent + ₹18,000 GST). If the tenant is using the office for business purposes and is registered under GST, they can claim ITC on the ₹18,000 GST paid, reducing their overall tax liability.
Scenario 2: A landlord leases out a retail space for ₹75,000 per month. They also charge ₹5,000 per month as a maintenance fee for common area services, which is subject to 18% GST. The total GST liability for the tenant will be ₹75,000 × 18% (on rent) + ₹5,000 × 18% (on maintenance), making a total GST of ₹15,300 on the combined amount.
Conclusion:
In India, GST applies to commercial lease agreements at a rate of 18% on the rental payments. Tenants who are GST-registered and use the commercial property for business purposes can claim Input Tax Credit (ITC) on the GST paid on rent. While security deposits are not subject to GST, maintenance charges and other fees may be. Both tenants and landlords must ensure proper documentation, including GST invoices, to comply with tax requirements and benefit from the available credits.
