Interest-free security deposit for lease will not attract GST, rules AAR

Interest-free security deposit, given for leasing a commercial property, will not attract Goods & Services Tax (GST), according to a ruling by the Maharashtra Authority for Advance Ruling.

However, if at the time of completion of lease tenure, the entire deposit or a part of it is withheld and not paid, as a charge against damages etc., then such amount withheld will be liable to GST as per the present GST laws, it said.

AAR helps the taxpayer by giving an advance decision in relation to the supply of goods and/or services proposed to be undertaken or being undertaken by the assessee. The decision is binding on the applicant and the jurisdictional tax authority. Though such a decision does not have precedent value like that of a High Court or Supreme Court judgment, it can be used as persuasive tool in future cases.

The case

The applicant, E-Square Leisure Private Ltd, had approached the AAR seeking clarifications on whether GST will be applicable on interest-free security deposit and notional interest if any, and in case GST is applicable, what will be the value of notional interest for the levy.

The company is engaged in providing various services, including renting of immovable property for commercial purposes. The applicant is discharging GST on the rent received in relation to such commercial properties.

The applicant contended that the amount collected as interest-free security deposit is not liable to GST. It argued that the definition of consideration given under the CGST Act specifically excludes any deposits, unless the same is applied as consideration for the supply. The security deposits taken from the occupant does not influence the rent payable for the commercial properties. The security deposits are only taken to safeguard the interests of the lessor.

It also said that taking deposits is a common practice across the country. Also, notional interest cannot be added in the consideration since there is no such provision under the GST law for its inclusion. Interestingly, the jurisdictional officer also echoed similar views as the applicant.

Observation and ruling

The authority observed that the definition of supply requires presence of consideration as an element for any of the defined transactions to be exigible to tax. Further, the definition of consideration given under the CGST Act, 2017 requires a direct link between the payment and supply. Deposits will only classify as consideration where the supplier appropriates such deposit as consideration for the said supply.

It also laid four parameters for a payment to qualify as ‘security deposit’ — for performance of an obligation, security against return of hired goods, security against damage to properties rented and it should be reasonable. The Authority concluded that these parameters apply in the present case, so it ruled that security deposit taken by the applicant cannot be treated as consideration for supply and they are not liable to pay any GST on the same.

Expert’s take

According to Harpreet Singh, Partner in KPMG, internationally also, security deposits are generally not liable to tax unless the same are appropriated towards a loss or damage. “The ruling has clearly laid the parameters for classifying a payment as ‘security deposit’. However, in order to determine the taxability one would still need to examine each case to ascertain whether the deposit has influenced the overall consideration or not,” he said.

COMMENT NOW