2021 (1) TMI 554 - AAAR - GST

Appellate ruling: Property taxes not deductible from rental income for GST. Notional interest on security deposit excluded. General exemption allowed.

The Appellate Authority upheld the ruling that property taxes and other statutory levies cannot be deducted from rental income for GST purposes. They also ... Value of supply - transaction value - consideration (including proviso that deposit is not consideration unless applied as such) - inclusion of taxes in value of supply - deduction of property tax from rental value - notional interest on security deposit as consideration - Section 15 valuation principleValue of supply - transaction value - inclusion of taxes in value of supply - deduction of property tax from rental value - Section 15 valuation principle - Whether property tax and other statutory levies paid to the Municipal Authority can be deducted from the monthly rental income in arriving at the value of supply of renting of immovable property. - HELD THAT: - The value of supply is the transaction value, i.e., the price actually paid or payable for the supply where parties are unrelated and price is the sole consideration. Section 15(2) requires inclusion in value of all taxes levied under any law in force, except CGST, SGST, IGST, UTGST and Compensation Cess which may be excluded only if charged separately in the invoice. Unlike the erstwhile service tax regime where a specific notification allowed abatement for property tax, GST contains no such provision. Consequently statutory levies like property tax paid to the Municipal Authority cannot be deducted from the monthly rent for computing the value of supply, save for the specific exclusions permitted under the Act when charged separately. [Paras 10, 11, 12, 16]Property tax and other statutory levies payable under any law cannot be deducted from the monthly rental income in computing the value of supply, except the specified GST/cess items when separately charged.Consideration (including proviso that deposit is not consideration unless applied as such) - notional interest on security deposit as consideration - deposit not consideration unless applied as consideration - Section 2(31) definition of consideration - Whether notional interest earned on an interest-free security deposit is to be included in total rental income as consideration for the renting service. - HELD THAT: - The definition of consideration includes payments made in respect of or for the inducement of supply but contains a proviso that a deposit shall not be considered payment for the supply unless the supplier applies the deposit as consideration. A security deposit collected and refunded without interest, held to secure performance or cover damage, is not consideration for the renting service. Interest earned by the supplier from investing the deposit is paid by a third party and lacks direct link to the renting service; there is no evidence that the deposit or its notional interest influences the agreed rent. In the absence of any such connection or application of the deposit as consideration, notional interest on the security deposit is not includible in the consideration for the renting service. [Paras 13, 14, 15, 16]Notional interest earned on the security deposit is not to be taken into consideration for arriving at total rental income.Final Conclusion: The AAAR modified the AAR: (i) property tax and other statutory levies cannot be deducted from monthly rent for GST valuation (except specified GST/cess items when separately charged); and (ii) notional interest on an interest-free security deposit is not includible in rental consideration. Issues Involved:1. Deduction of property taxes and other statutory levies from rental income.2. Inclusion of notional interest on the security deposit in total rental income.3. Entitlement to tax exemption under the general exemption of Rs. 20 lakhs.Detailed Analysis:Issue 1: Deduction of Property Taxes and Other Statutory Levies from Rental Income- Appellant's Argument: The appellant argued that property taxes levied by the Municipal Corporation are not part of the rental services rendered and should not be included in the rental income for GST purposes. They contended that property tax is not related to the consideration for rental service and should be abatable from the total rental income.- AAR's Ruling: The AAR held that property taxes and other statutory levies cannot be deducted for the purpose of arriving at the value of rental income.- Appellate Authority's Decision: The Appellate Authority upheld the AAR's decision, stating that Section 15 of the CGST Act governs the value of supply, which includes all taxes levied under any law in force, except CGST, SGST, IGST, UTGST, and Compensation Cess if charged separately. The authority noted that there is no provision under GST law for the abatement of property tax from the value of taxable service of renting of immovable property, unlike the previous service tax regime. Therefore, property tax paid to the Municipal Authority cannot be deducted from the monthly rental income for arriving at the value of supply.Issue 2: Inclusion of Notional Interest on the Security Deposit in Total Rental Income- Appellant's Argument: The appellant argued that notional interest on the security deposit should not be added to the total rental income unless it can be shown that the interest-free deposit has influenced the rent. They cited various court decisions, including a Supreme Court decision, supporting their view that notional interest cannot be added without evidence of its influence on the rental price.- AAR's Ruling: The AAR held that notional interest on the security deposit should be considered for computing the total income from rentals if it influences the value of supply.- Appellate Authority's Decision: The Appellate Authority disagreed with the AAR's findings. They examined the definition of 'consideration' under Section 2(31) of the CGST Act and concluded that the security deposit is not a consideration for the renting service unless it is applied as such by the supplier. The authority noted that the interest earned on the security deposit is not a payment made in respect of or for the inducement of the renting service and has no direct link to the supply of the service. Therefore, the notional interest earned on the security deposit is not to be included in the total rental income.Issue 3: Entitlement to Tax Exemption under the General Exemption of Rs. 20 Lakhs- AAR's Ruling: The AAR ruled that the appellant is entitled to 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.- Appellate Authority's Decision: The Appellate Authority did not specifically address this issue in their order, but by ruling that notional interest is not to be included in the total rental income, it can be inferred that the appellant's entitlement to the exemption would be based on their actual rental income without the inclusion of notional interest.Order:The Appellate Authority modified the advance ruling as follows:1. The appellant cannot deduct property tax or other statutory levies from the rental income, except for CGST, SGST, IGST, and Compensation Cess if charged separately.2. The notional interest earned on the security deposit is not to be taken into consideration for arriving at the total rental income.The appeal filed by the appellant is disposed of on these terms.