2020 (9) TMI 784 - AAR - GST

Rental Income Tax: Property Taxes Not Deductible, Notional Interest Considered. General Exemption Applies

The ruling in this case determined that the applicant cannot deduct property taxes and statutory levies from rental income. Notional interest on the ... Value of supply - inclusion of taxes, duties, cesses and charges in taxable value - consideration - refundable security deposit not consideration unless applied as such - notional interest on security deposit as part of value if it influences transaction price - total turnover for threshold exemptionValue of supply - inclusion of taxes, duties, cesses and charges in taxable value - Property taxes and other statutory levies paid in relation to the rented immovable property cannot be deducted from the rental income when determining the taxable value of the supply. - HELD THAT: - Section 15(2) requires that taxes, duties, cesses, fees and charges levied under any law (other than the GST enactments specified) be included in the value of supply if charged separately by the supplier. The transaction value under Section 15(1) is the price actually paid or payable where parties are unrelated and price is the sole consideration; in the present case monthly rent is the transaction value. Property tax levied by BBMP is a tax under a local law and thus cannot be deducted from the value of the taxable supply of Renting of Immovable Property service. [Paras 6]Property tax and similar statutory levies are not deductible from the taxable value of rental services.Consideration - refundable security deposit not consideration unless applied as such - notional interest on security deposit as part of value if it influences transaction price - An interest free refundable security deposit is not consideration for renting of immovable property unless applied as consideration; notional interest on such deposit shall form part of the value of supply only if it influences the rent charged. - HELD THAT: - The proviso to the definition of consideration excludes refundable deposits unless the supplier applies them as consideration; here the security deposit is an interest free refundable guarantee and therefore is not consideration for the supply unless forfeited or appropriated at lease expiry. On notional interest, precedents following the Supreme Court decision in I.S.P.L. Industries Ltd. require examination of whether the notional interest has influenced the price. Where notional interest bears nexus to the supply and has influenced the rent, it must be included in the value and leviable to GST; absent evidence that the notional interest affects the transaction price, it need not be included. The applicant did not furnish sufficient data to establish whether the notional interest influenced the rent, so inclusion depends on such influence being shown. [Paras 6]Security deposit is not consideration unless applied as such; notional interest is exigible only if it influences the value of the renting service.Total turnover for threshold exemption - notional interest on security deposit as part of value if it influences transaction price - The applicant is entitled to the general threshold exemption for registration provided their annual total turnover, inclusive of monthly rent and any notional interest that influences the value of supply, does not exceed the prescribed limit. - HELD THAT: - Total turnover in a State includes aggregate value of taxable and exempt supplies as defined in Section 2(112). The interest free refundable security deposit does not constitute supply and so is excluded; however, notional interest, if it influences the value of supply, forms part of consideration and must be included in turnover. Given the applicant's declaration of no other business, entitlement to exemption is subject to the annual turnover (including rent and any relevant notional interest) remaining within the threshold. [Paras 7]Entitlement to the threshold exemption is subject to annual turnover (including rent and any notional interest that influences value) not exceeding the limit.Final Conclusion: Advance ruling: property taxes and statutory levies cannot be deducted from taxable rent; refundable security deposit is not consideration unless applied as such and notional interest is includible in value only if it influences the rent; applicant qualifies for the threshold exemption subject to annual turnover (including any such notional interest, if it influences value) remaining within the limit. Issues Involved:1. Deduction of property taxes and statutory levies from rental income.2. Consideration of notional interest on security deposit for rental income.3. Entitlement to tax exemption under the general exemption of Rs. 20 lakhs.Detailed Analysis:Issue 1: Deduction of Property Taxes and Statutory Levies from Rental IncomeThe applicant sought clarification on whether property taxes and other statutory levies paid by them could be deducted from the rental income to arrive at the value of rental income. According to Section 15(2) of the CGST Act 2017, 'the value of supply shall include any taxes, duties, cesses, fees, and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier.' The property tax levied by BBMP under the Karnataka Municipalities Act 1964 is not excluded from the value of the taxable supply. Therefore, the property tax cannot be deducted from the value of taxable supply of 'Renting of Immovable Property' service.Issue 2: Consideration of Notional Interest on Security Deposit for Rental IncomeThe applicant questioned whether notional interest on the security deposit should be considered for arriving at total income from rental. The draft rental agreement specified that the lessee would pay a monthly rent of Rs. 1,50,000/- and an interest-free refundable security deposit of Rs. 5 Crore. The security deposit, taken as a guarantee against damage to property, is not considered as payment for the supply of the Renting of Immovable Property Service (RIS) unless it is applied as consideration for the supply. Notional interest on the security deposit is considered part of the value of supply if it influences the value of the supply, i.e., the monthly rent. The security deposit is invariably collected in all leasing cases, and higher deposits generally result in lower monthly rents. Therefore, there is a nexus between the security deposit and the rent charged. The notional interest earned from the security deposit must be considered part of the value of supply if it influences the value of the supply and is subject to GST along with the monthly rent.Issue 3: Entitlement to Tax Exemption under the General Exemption of Rs. 20 LakhsThe applicant inquired about their entitlement to tax exemption under the general exemption of Rs. 20 lakhs. Section 2(112) of the CGST Act, 2017 defines total turnover in a State or Union Territory. The interest-free security deposit does not fall under the purview of supply as it is not considered a consideration. However, notional interest on the security deposit becomes part of consideration if it influences the value of supply. The applicant is entitled to the general exemption for registration purposes, provided their annual total turnover, including monthly rent and notional interest (if it influences the value of supply), does not exceed the threshold limit.Ruling:1. The applicant cannot deduct property taxes and other statutory levies for the purpose of arriving at the value of rental income.2. Notional interest on the security deposit shall be taken into consideration for arriving at total income from rental only if it influences the value of the supply of RIS service, i.e., monthly rent.3. The applicant is entitled to exemption of tax under the general exemption of Rs. 20 lakhs, subject to the condition that their annual turnover, including monthly rent and notional interest (if it influences the value of supply), does not exceed the threshold limit.