Renting residential dwellings to registered entities taxable under GST reverse charge; ITC blocked as employee accommodation is exempt

AAR held that renting of residential dwellings by various unregistered landlords to the applicant, a registered person, constitutes a taxable supply of services to the applicant under GST. The employer-employee relationship applies only to the subsequent provision of accommodation by the applicant to its employees and does not alter the independent landlord-applicant transaction. As the applicant is a registered entity (not a proprietorship), the exemption for residential dwelling renting is inapplicable, and GST is payable under reverse charge on the rent. AAR further held that ITC of GST paid under reverse charge is not available, as the corresponding outward supply to employees is exempt.

---

---

1. ISSUES PRESENTED AND CONSIDERED

(1) Whether services by way of renting of residential dwellings by unregistered landlords to a registered person, who further allots them as staff quarters to employees as a welfare/perquisite measure, are liable to GST under the reverse charge mechanism (RCM) in terms of Section 9(3) of the CGST Act and the applicable notifications.

(2) Whether the provision of residential accommodation by an employer to employees, as part of the contractual terms of employment or company policy and without separate recovery of rent, constitutes a "supply" liable to GST, or is covered by Schedule III to the CGST Act as neither a supply of goods nor a supply of services.

(3) Whether input tax credit (ITC) is admissible on GST paid under RCM on the renting of residential dwellings by the registered employer from unregistered persons where such dwellings are used to provide rent-free residential accommodation to employees as a perquisite under the employment contract.

(4) Whether employer-provided transportation and canteen facilities, when covered in the employment contract, being treated as non-taxable on the employer-employee footing, can by analogy justify a similar non-taxable treatment for the renting of residential dwellings to the employer under RCM.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (1): GST liability under RCM on renting of residential dwellings by unregistered landlords to a registered employer

Legal framework

(a) Section 9(3) of the CGST Act, 2017 empowers the Government to specify categories of supply of goods or services on which the tax shall be paid on reverse charge by the recipient.

(b) Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017, as amended by Notification No. 5/2022-Central Tax (Rate) dated 13.07.2022, inserted Sl. No. 5AA providing that "Service by way of renting of residential dwelling to a registered person" is taxable under RCM, where the supplier is "any person" and the recipient is "any registered person".

(c) Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended, at Sl. No. 12, exempts "services by way of renting of residential dwelling for use as residence, except where the residential dwelling is rented to a registered person", subject to a limited exception for proprietors renting in their personal capacity (Explanation 1) and excluding certain accommodation services (Explanation 2).

Interpretation and reasoning

(d) The Tribunal distinguishes two separate transactions: (i) renting of residential dwellings by various unregistered landlords to the applicant (registered employer), and (ii) provision of residential accommodation by the applicant to its employees. The employer-employee relationship is held to be relevant only to the second transaction, and not to the first.

(e) For the first transaction, the suppliers are "unregistered landlords" and the recipient is a "registered person". The applicant is not a proprietorship, and the dwellings are not rented in the personal capacity of a proprietor. Thus, the exemption under Sl. No. 12 of Notification No. 12/2017 does not apply; by express language, the exemption is inapplicable where residential dwelling is rented to a registered person (other than the narrow proprietor exception).

(f) Under Sl. No. 5AA of Notification No. 13/2017 (as amended), any service of renting of residential dwelling to a registered person attracts GST under RCM, payable by the registered recipient. The supplier category being "any person" covers the unregistered landlords; thus registration status of landlords is irrelevant for triggering RCM.

Ratio vs. Obiter

(g) The finding that the renting of residential dwellings by unregistered landlords to the applicant is a taxable supply to a registered person, covered by Sl. No. 5AA of Notification No. 13/2017, and thereby liable to GST under RCM, forms the operative ratio.

Conclusion

(h) GST is payable under reverse charge by the registered employer on rent paid to unregistered landlords for residential dwellings used as staff quarters, by virtue of Sl. No. 5AA of Notification No. 13/2017-Central Tax (Rate), as amended by Notification No. 5/2022-Central Tax (Rate).

Issue (2): Taxability of employer-provided residential accommodation to employees

Legal framework

(a) Section 7(2)(a) of the CGST Act, read with Entry 1 of Schedule III, provides that "services by an employee to the employer in the course of or in relation to his employment" shall be neither a supply of goods nor a supply of services.

(b) Circular No. 172/04/2022-GST dated 06.07.2022 (CBIC), at Serial No. 5, clarifies that perquisites provided by the employer to employees in terms of the contractual agreement are in lieu of services provided by employees in relation to their employment and will not be subjected to GST when provided as per the employment contract.

Precedent treatment

(c) The Tribunal relies upon the CBIC Circular No. 172/04/2022-GST to clarify the GST treatment of perquisites provided under the employment contract. No conflicting judicial precedent is formally analyzed, though the applicant had referred to rulings on other perquisite-type services (canteen, transport) for analogy.

Interpretation and reasoning

(d) The Tribunal assumes, as a foundational fact, that residential accommodation is provided to employees as part of the employment contract or company policy, without any separate rent or recovery from employees. This is treated as a perquisite forming part of the overall compensation/CTC.

(e) Applying the Circular, such perquisites are considered to arise from the contractual employment relationship and are in lieu of services rendered by employees; they therefore fall within the employer-employee nexus contemplated by Schedule III, and are treated as neither a supply of goods nor a supply of services.

(f) On this factual basis, the Tribunal concludes that the provision of residential accommodation by the employer to employees, without any independent consideration, is a non-taxable transaction falling outside the scope of GST.

(g) The Tribunal expressly delineates an alternative scenario: if the employer were to charge rent or recover any amount from employees for such accommodation, the transaction "may amount to an outward supply for consideration", potentially attracting GST. However, this is expressly marked as outside the ruling, which is confined to the fact situation where no consideration is recovered.

Ratio vs. Obiter

(h) The determination that employer-provided, rent-free staff quarters, extended as a perquisite under the employment contract and without separate recovery, are not a "supply" under GST but fall under Schedule III, is the operative ratio.

(i) The observation that a different tax result "may" follow if rent or recovery is made from employees is obiter, confined to a hypothetical scenario not arising on the facts presented.

Conclusion

(j) Accommodation provided by the employer to employees as a perquisite under the employment contract or policy, with no separate recovery of rent, is neither a supply of goods nor a supply of services under Schedule III and is not liable to GST.

Issue (3): Eligibility of ITC on GST paid under RCM on residential dwelling rent used for employee accommodation

Legal framework

(a) Section 16(1) of the CGST Act permits a registered person to take ITC on input tax charged on supply of goods or services used or intended to be used in the course or furtherance of business, subject to conditions and restrictions.

(b) Section 17(2) of the CGST Act stipulates that where goods or services are used partly for effecting taxable supplies and partly for effecting exempt supplies, the ITC shall be restricted to the amount attributable to taxable supplies.

(c) Section 2(47) of the CGST Act defines "exempt supply" to include "non-taxable supply".

Interpretation and reasoning

(d) The renting of residential dwellings from landlords is an "inward supply" on which the applicant pays GST under RCM. This service is used to provide accommodation to employees which, on the facts of this case, has been held to be neither a supply of goods nor a supply of services and hence outside GST.

(e) By virtue of Section 2(47), this non-taxable outward provision of accommodation constitutes an "exempt supply". Therefore, the inward RCM-taxed service is used for making an exempt (non-taxable) outward activity.

(f) Applying Section 17(2), input tax attributable to exempt supplies is not admissible as ITC. Since the entire use of the inward renting service, on the stated facts, is for providing staff accommodation that qualifies as an exempt (non-taxable) activity, ITC on the corresponding RCM tax is barred.

Ratio vs. Obiter

(g) The holding that the non-taxable (Schedule III) provision of residential accommodation to employees is treated as an "exempt supply" for purposes of Section 17(2), and that ITC on RCM for renting such dwellings is inadmissible, is ratio and directly answers the question posed.

Conclusion

(h) The applicant is not eligible to avail ITC on GST paid under RCM on renting of residential dwellings from landlords, to the extent such dwellings are used to provide rent-free accommodation to employees as a perquisite under the employment contract.

Issue (4): Analogy with transportation and canteen facilities provided by employer to employees

Legal framework and precedent references

(a) The applicant relied on the principle that employer-provided canteen and transportation facilities, when forming part of the employment contract, are treated as non-taxable, referring inter alia to a Press Release dated 10.07.2017 and a Maharashtra AAR ruling (Tata Motors Ltd.) which held that nominal recoveries from employees for transportation services cannot be treated as taxable supplies by the employer.

(b) The applicant also acknowledged contrary views in rulings of the Kerala AAR and AAAR (Caltech Polymers Pvt. Ltd.) in respect of canteen recoveries from employees, which treated full or non-subsidized recoveries as taxable outward supplies.

Interpretation and reasoning

(c) The Tribunal characterizes the renting of residential dwellings by landlords to the applicant as a distinct and independent transaction between landlord and employer, unaffected by the employer-employee relationship, unlike perquisites directly provided under the contract of employment.

(d) It holds that the analogy to transportation and canteen facilities is misplaced at the level of the landlord-employer transaction. Even if the subsequent provision of accommodation to employees is non-taxable under Schedule III, the initial renting to the registered employer is squarely covered by Sl. No. 5AA of Notification No. 13/2017 and thus attracts RCM.

(e) Accordingly, the Tribunal rejects the extension of the employer-employee protection (Schedule III) to the independent inward supply from third-party landlords to the employer.

Ratio vs. Obiter

(f) The conclusion that the employer-employee exemption logic applicable to transportation/canteen perquisites cannot be transposed to negate RCM on the landlord-to-employer renting transaction forms part of the reasoning underpinning the ratio on Issue (1). Specific earlier advance rulings cited by the applicant are not followed or overruled but are effectively distinguished on factual and transactional grounds.

Conclusion

(g) Employer-employee treatment of perquisites such as transportation and canteen facilities does not exempt or alter the GST liability under RCM on the renting of residential dwellings to the employer by third-party landlords; the latter is a distinct taxable transaction governed by Notification No. 13/2017 (as amended).

---