Goods & Services Tax (GST) is required to be paid for the properties rented out by the partner to his partnership firm, Tamil Nadu Authority for Advance Rulings (TNAAR) has said. This will be applicable even if there is NIL rent.

The applicant, Chennai based Shanmuga Durai is the Managing Partner of a partnership firm and also owns certain properties. The firm in which he is partner is carrying out businesses in those properties, free of rent. In his application, he stated that under the Income Tax Act, it is clear that when the partner uses his property for businesses carried out by the firm, then deemed rent does not arise. The applicant sought clarity from AAR under GST law for the same.

Four queries

The applicant raised four queries. First, whether GST liability does arise in respect of property of the partner used by the partnership firm to carry out the business by the firm, free of rent. Second, if so, what is the relevant section or rule or provision in GST law, under which the partner of the firm is required to pay GST on notional rent? Third, is it mandatory to execute rental deed between partner and partnership firm, when there is no furtherance of business for that partner? And fourth, what is the applicable valuation rule, when consideration is not fixed and not received by the Partner?

After going through all the facts and arguments, AAR ruled that where the supply is between related persons, the value of such supply will be the open market value of that. In case open market value is not available, the value of supply of goods and or services of like kind and quality will be the taxable value.

Further, it said that in this particular matter, the property being rented, and the supplier and recipient are related. Accordingly, Rule 28 (related with determining value of supply of goods/services or both between distinct or related persons) of GST Act will apply. Accordingly, value should be arrived at for the purpose of taxation.

“The activity of renting out immovable properties owned by the applicant as an individual person to the partnership firm, another individual person, in which he is a major shareholding partner and Managing Partner, even without consideration, is a taxable supply,” AAR said.

This means GST is liable to be paid in respect of properties of the applicant rented out to the partnership firm, to carry out the business of the firm, even it is free of rent, as the “activity is in furtherance of business and amount to supply” as per GST law.

AAR ruling is applicable only on the applicant and the jurisdictional tax officer in that particular matter. However, it can be relied upon in similar matters. Also, Central Board of Indirect Taxes and Custom (CBIC) uses verdicts by AAR and Appellate Authority (AAAR) in making changes in rules for everyone.

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