Property taxes, notional-interest on deposit influencing ‘supply-value’ do form part of ‘rental-income’, says AAR

Property tax and other statutory levies cannot be deducted from rental income for the purpose of arriving at the value of supply of renting services, Karnataka’ Authority for Advance Ruling (AAR) said in a recent ruling.

This ruling is important for organisations which rent building for commercial activities and for entities which are in the business of renting of commercial property on monthly basis.

The applicant, Bengaluru based Midcon Polymers has proposed to engage in the business of renting of commercial property on monthly rentals and allied business. It intends to enter into a contractual agreement of renting of immovable property with an educational institutional in Bengaluru. The contract in on the basis of the reserved monthly rental of ₹1.50 lakh and also refundable caution deposit of ₹5 crore, which will be returned without interest on the termination of the tenancy.

The applicant approached AAR to know whether there can be deduction of property taxes and other statutory dues and whether notional interest on the security deposit should be taken into consideration for the purpose of arriving at the value of rental income. Another question was whether the applicant is entitled for exemption of tax under the general exemption of ₹20 lakh.

After hearing, AAR said: “The Applicant cannot deduct the property-tax & other statutory levies from rental income for the purpose of arriving at value of supply of renting service.”

It observed that that the security deposit is an interest free refundable deposit which shall be returned to the lessee on lease termination. Accordingly, it held that it will not be considered as a supply of renting of immovable property service. However, it mentioned that if at the expiry of the lease tenure, the entire deposit or part of it is withheld and not paid back, then at that stage such amounts not refunded will be liable to GST.

With respect to notional interest earned out of the security deposit by the Applicant, AAR said that quantum of deposit higher than rent is general practice and there is co-relation between these two. However, the Applicant here has not furnished adequate data to decide whether actually the notional interest influences the monthly rental amount.

Inferring that notional interest that the applicant earns is in respect of supply of rental service though is not by recipient of service but from other person, AAR held: “Notional interest has to be considered as part of value of supply of service, if and only if the said notional interest influences the value of supply” and is leviable to GST along with the monthly rent at rate applicable thereto.”

It also held that that applicant is entitled for general exemption of ₹20 lakh for registration purpose subject to the condition that their annual total turnover which includes monthly rent and notional interest, if it influences the value of supply, doesn’t exceed the threshold limit.