Leased residential complexes to be used as paying guest facility will attract GST:AAR

Letting out a residential complex as a paying guest accomodation will attract GST, according to Karnataka’s Authority on Advance Ruling (AAR).

The applicant (Taghar Vasudeva Ambris), along with four others, collectively let out a residential complex to a company named D. Twelve Spaces Pvt. Ltd by entering into a lease agreement. The lessee is engaged in the business of providing affordable residential accommodation to students on a long-term basis. Along with such accommodation, the lessee is also engaged in providing a host of other services such as maintenance, food, Wi-Fi, etc. generally called as a ‘Paying Guest Accommodation.’

The applicant sought advanced rulings on two issues — whether exemption of services by way of renting of residential dwelling for use as residence can be availed and lessors not charge GST while issuing the invoice for lease on the company and whether the lease service falls under the exemption prescribed and can be described as “Services by way of renting of residential Dwelling for use as residence.”

Though the AAR rulings are applicable only on the assessees and the tax jurisdiction involved in the matter and do not have precedent value such as rulings by the Supreme Court or High Court, such rulings have persuasive value. Also, businesses would like to use such ruling in their tax planning and business strategy.

AAR’s contention

AAR observed that the property, consisting of ‘42 rooms along with 2,400 sq ft of terrace area,’ cannot be termed as a residential dwelling. It also said that the applicant, along with other lessors, has collectively leased out their premises, and infers that the contract is for the entire property given as a single piece and that sharing of the rent is only an apportionment of the common income.

It opined that the amount collected is in course of or furtherance of business, hence, the transaction between the lessor and Company would constitute a ‘supply’ of service in terms of law. It also noted that applicant is not providing the service of leasing in individual capacity to the lessee but as a part of the group of lessors, and held that the question of charging GST for the transaction between the applicant and Company does not arise as applicant is not effecting any supply of service to the Company directly.

Accordingly, the Authority replied in negative to both the issues raised. Also, it said that GST should be charged as the supply involves letting out of the residential building for business or commerce.

Commenting on the ruling, Harpreet Singh, Partner at KPMG, said with new models like group leasing, co-living residential variants, joint-leasing, student homes etc, being in vogue, it is critical that the intent and substance of the transaction i.e. residential vis-à-vis commercial leasing is ascertained for determining the taxability. “This is an interesting case law which, in a way, has relied upon the intention of the parties to lease, instead of merely looking at the end use of the property,” he said.

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