2019 (4) TMI 805 - AAR - GST

GST not applicable on interest-free security deposits per AAR ruling

The Authority for Advance Ruling (AAR) ruled that GST is not applicable to interest-free security deposits as they are not considered as consideration ... Levy of GST on interest-free security deposit - Consideration under the GST Act - Deposit not being consideration unless appropriated as payment - Notional interest and its inclusion in taxable valueLevy of GST on interest-free security deposit - Consideration under the GST Act - Deposit not being consideration unless appropriated as payment - GST liability on interest-free refundable security deposit taken from lessee for leasing of commercial immovable property - HELD THAT: - The Authority examined whether the interest-free refundable security deposit taken as a guarantee against damage to leased premises constitutes 'consideration' for supply under the GST Act. The definition of 'consideration' is inclusive but expressly provides that a deposit given in respect of a supply shall not be considered as payment for that supply unless the supplier applies such deposit as consideration. Applying established tests and the facts before it - that the deposit is refundable, taken as security for performance/possible damages and will not be appropriated by the applicant as payment during the lease term - the Authority found there is no close nexus between the deposit and the consideration for supply. Consequently the deposit does not qualify as consideration for the taxable supply of renting services while it remains refundable. The Authority also noted that if, at the end of the lease, the supplier withholds any part of the deposit as compensation for damages (i.e., appropriates it as payment), that portion would then be liable to GST under the law.GST is not leviable on the interest-free refundable security deposit while it remains a refundable security; amounts appropriated/withheld as payment against damages at lease termination will be taxable.Notional interest and its inclusion in taxable value - Levy or computation of GST on notional interest arising from interest-free security deposits - HELD THAT: - The Authority did not adjudicate the question of valuation or the notional interest to be included in taxable value because its primary conclusion that the interest-free refundable security deposit does not constitute consideration rendered the secondary question academic. Consequently the Authority left the issue of whether notional interest could be included in the value for GST, and if so the method of computation, unanswered.Not answered.Final Conclusion: The Authority rules that interest-free refundable security deposits taken by the applicant for leasing commercial property are not liable to GST while retained as refundable security, but any part of the deposit subsequently appropriated or withheld as payment (for damages etc.) will be taxable; the question of notional interest and its valuation is left unanswered. Issues Involved:- Whether GST would be applicable on interest-free security deposits and notional interest, if any.- In case GST is applicable, what would be the value of notional interest for the levy of GST.Detailed Analysis:1. Applicability of GST on Interest-Free Security Deposits and Notional Interest:The applicant, engaged in renting immovable property for commercial purposes, sought clarification on whether GST applies to interest-free security deposits and any notional interest. The security deposit is taken as a guarantee against damages to the property, and it is refundable upon the lease's completion.The definition of 'consideration' under Section 2(31) of the CGST Act specifies that deposits given in respect of the supply of goods or services shall not be considered as payment unless applied as consideration for the said supply. The applicant argued that since the security deposit is refundable and not applied as consideration, it should not attract GST.The Authority for Advance Ruling (AAR) reviewed the facts and submissions, noting that the deposit is taken to secure against damages and is refundable. The AAR concluded that since the deposit is not applied as consideration for the supply, it does not constitute consideration under the GST Act. Therefore, GST is not applicable to the interest-free security deposit.2. Value of Notional Interest for Levy of GST:Given the conclusion that GST is not applicable to the interest-free security deposit, the AAR did not address the question regarding the value of notional interest for the levy of GST.Conclusion:The AAR ruled that GST is not applicable to interest-free security deposits. The question regarding the value of notional interest for levy of GST was not answered due to the conclusion on the first issue.Order:- Question: Whether GST would be applicable on interest-free security deposit and notional interest if anyRs.- Answer: GST is not applicable on interest-free security deposits.- Question: In case GST is applicable, what would be the value of notional interest for levy of GSTRs.- Answer: Not answered in view of the answer to the first question.