GST applicable on actual expense reimbursement in lease agreements determined by AAR

The Authority for Advance Ruling (AAR) concluded that GST is levied on the reimbursement of expenses from the lessee by the lessor at actuals. The AAR determined that the reimbursement of expenses, including utilities like electricity and water, in conjunction with renting immovable property, constitutes a composite supply where the principal supply is the renting of immovable property. Therefore, GST would be payable at the rate applicable to the principal supply, which is the renting of immovable property.

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Issues Involved:
1. Whether GST is levied on the reimbursement of expenses from the lessee by the lessor at actuals.
2. In case GST is levied, what is the rate of GST applicable to said reimbursement of expenses.

Detailed Analysis:

Issue 1: Whether GST is levied on the reimbursement of expenses from the lessee by the lessor at actuals.
The applicant, engaged in the business of renting immovable property, sought clarity on whether GST applies to reimbursements for utility expenses such as electricity, water charges, property tax, and cooking fuel from the lessee.

The applicant argued that these reimbursements do not constitute a supply under Section 7 of the CGST Act, as they are merely repayments for expenses incurred on behalf of the lessee. They further contended that under Rule 33 of the CGST Rules, reimbursements made in the capacity of a 'pure agent' are not liable to GST.

However, the Authority for Advance Ruling (AAR) concluded that the conditions for a 'pure agent' under Rule 33 were not fulfilled. Specifically, the applicant did not have authorization from the lessee to act as a pure agent, and the expenses were incurred for the applicant's own account rather than on behalf of the lessee.

Additionally, the AAR noted that the supply of utilities like electricity and water is essential for the operation of the theatre and is inherently linked to the renting of the property, thus forming part of a composite supply.

Conclusion: GST is levied on the reimbursement of expenses from the lessee by the lessor at actuals.

Issue 2: In case GST is levied, what is the rate of GST applicable to said reimbursement of expensesRs.
The AAR examined whether the reimbursement of expenses should be taxed at the rate applicable to the individual expenses or as part of the composite supply of renting immovable property.

The AAR determined that the provision of utilities such as electricity and water, along with the renting of immovable property, constitutes a composite supply under Section 2(30) of the CGST Act. In a composite supply, the principal supply determines the tax rate for the entire supply. Here, the principal supply is the renting of immovable property.

Conclusion: GST would be payable at the rate applicable to the principal supply, which is the renting of immovable property.

Order:
1. Question: Whether GST is levied on the reimbursement of expenses from the lessee by the lessor at actualsRs.
Answer: Yes, GST is levied on the reimbursement of expenses from the lessee by the lessor at actuals.

2. Question: In case GST is levied, what is the rate of GST applicable to said reimbursement of expensesRs.
Answer: As the reimbursement of the expenses constitutes a composite supply, GST would be payable at the rate applicable to the principal supply.

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