Student, worker hostels via commercial lease not exempt as residential renting under Entry 12, taxable under Sl.16(iii)

AAR (Guj) held that the applicant's leasing of a commercially classified property to an unregistered lessee for providing long-term accommodation to students and working professionals does not qualify as exempt "renting of residential dwelling for use as residence" under Entry 12 of Notification No. 12/2017-CT (Rate). The lessee was not using the premises as its own residence but for a commercial activity of supplying accommodation, defeating the exemption's personal residential-use requirement. The supply was classified under Sl. No. 16(iii) of Notification No. 11/2017-CGST (Rate) as renting of immovable property, taxable at 18%. Being registered under GST, the applicant is liable to discharge GST on such rental income.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether leasing of a building, classified and described in the lease deed as a "commercial building", by the applicant to an unregistered company for running long-term residential accommodation for students and working professionals, qualifies as exempt "services by way of renting of residential dwelling for use as residence" under Entry 12 of Notification No. 12/2017-Central Tax (Rate) and the corresponding State notification.

1.2 If the above exemption is inapplicable, how the service supplied by the applicant is to be classified for GST purposes, what rate of tax applies, and on whom the liability to pay GST falls.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Applicability of exemption under Entry 12 of Notification No. 12/2017-CT(R)

Legal framework discussed

2.1 The Court examined Entry 12 of Notification No. 12/2017-Central Tax (Rate), as amended from time to time, particularly:

(a) Pre-18.07.2022: "Services by way of renting of residential dwelling for use as residence".

(b) From 18.07.2022: "Services by way of renting of residential dwelling for use as residence except where the residential dwelling is rented to a registered person".

(c) From 01.01.2023: same entry with Explanation 1 regarding renting by a proprietor in personal capacity.

(d) From 15.07.2024: Entry 12 confined to Heading 9972 (renting of immovable property), with Explanation 1 (proprietor using for own residence) and Explanation 2 excluding "accommodation services for students in student residences" and "accommodation services provided by Hostels, Camps, Paying Guest accommodations and the like"; new Entry 12A for "accommodation services" under Heading 9963.

Interpretation and reasoning

2.2 The Court accepted that there are two distinct supplies:

(i) Renting of immovable property by the applicant to the lessee, classifiable under Heading 9972;

(ii) Accommodation services by the lessee to students/working professionals, classifiable under Heading 9963.

2.3 The Court agreed with the applicant on four of the conditions enumerated by the applicant but disagreed on the second and third conditions, namely:

(a) Whether the property rented is a "residential dwelling"; and

(b) Whether such dwelling is rented "for use as residence".

2.4 On the nature of the property, the Court relied on the language of the draft lease agreement, which describes the subject premises as a "Commercial Building" and proceeds on the footing that it is a commercial property, registered and held as such. On this basis, the Court held that the premises is commercial, not residential, and therefore the ratio of authorities dealing with residential premises is not directly applicable.

2.5 The Court distinguished the Delhi High Court decision interpreting "residential accommodation" under the Delhi Rent Control law, noting that in that case the premises were residential and being partly used as office; whereas in the present case the premises are a "commercial building" ab initio, so the reasoning in that judgment does not assist the applicant.

2.6 The Court further examined the Karnataka High Court decision in Taghar Vasudeva Ambrish, noting two aspects:

(a) The accommodation used there as hostel for students/working women was classified as "residential" in the relevant Master Plan, unlike the present case where the premises are classified and described as commercial; and

(b) A Special Leave Petition has been filed against that judgment and leave has been granted by the Supreme Court, placing the High Court judgment "in jeopardy" and preventing it from attaining finality as a binding precedent, in line with the principles laid down in Kunhayammed and West Coast Paper Mills.

2.7 The Madras High Court decision in Thai Mookambikaa Ladies Hostel was also held distinguishable, as in that case the petitioners themselves were directly providing residential hostel accommodation and claiming exemption, whereas here the applicant is only leasing a commercial building to another entity that provides accommodation. Additionally, that judgment relied on Taghar Vasudeva Ambrish, whose precedential value is already uncertain due to the pending appeal, and a writ appeal has also been filed against the Madras High Court judgment.

2.8 The Court considered the evolution of Entry 12 and held that the subsequent amendments are indicative of legislative intent. By inserting the phrase "except where the residential dwelling is rented to a registered person" and later the explanations limiting exemption to personal residential use (in the case of proprietors) and carving out accommodation/hostel/PG services separately under Heading 9963, the Government's intent is to restrict the exemption to genuine residential use in personal capacity and not to premises used commercially, even if ultimately occupied for residence by third parties.

2.9 Applying this intent to the facts, the Court held that the lessee is not using the premises as its own residence but for a commercial activity of providing residential accommodation (with possible ancillary services such as meals, laundry, wi-fi etc.) to students and working professionals for consideration. The use of the property is therefore commercial in nature and not "for use as residence" in the sense contemplated by the exemption.

Conclusions on Issue 1

2.10 The premises leased by the applicant is a commercial building and not a "residential dwelling" in the sense required by Entry 12.

2.11 The lessee does not use the premises as its own residence but for a commercial business of providing accommodation to others; the exemption is intended only for use as personal residence and not for such commercial exploitation.

2.12 Authorities relied upon by the applicant, including Taghar Vasudeva Ambrish and Thai Mookambikaa Ladies Hostel, are factually distinguishable and/or under challenge and do not govern the present case.

2.13 The applicant's supply does not qualify for exemption under Entry 12 of Notification No. 12/2017-Central Tax (Rate) or the corresponding State notification.

Issue 2 - Classification, rate and liability to pay GST on the applicant's supply

Legal framework discussed

2.14 The Court referred to Heading 9972 (Real estate services) and specifically SAC 997211 (rental or leasing services involving own or leased residential property).

2.15 The Court examined Notification No. 11/2017-Central Tax (Rate) prescribing GST rates on services, and particularly Entry 16 under Heading 9972:

(i) Lease of land by Government, etc. - Nil;

(ii) Certain composite construction-related land leases - Nil; and

(iii) "Real estate services other than (i) and (ii) above" - taxed at 9% CGST (18% total, including SGST).

Interpretation and reasoning

2.16 The Court accepted the applicant's own characterization that the service provided to the lessee is "renting of immovable property" falling under Heading 9972.

2.17 Since the applicant is not covered by sub-entries (i) or (ii) of Entry 16, the rental service supplied falls under residual sub-entry (iii) - "Real estate services other than (i) and (ii) above".

2.18 There is no reverse charge mechanism notified for this transaction; therefore, as a registered supplier of the renting service, the applicant is liable to discharge GST under the forward charge mechanism.

Conclusions on Issue 2

2.19 The renting service supplied by the applicant to the lessee is classifiable under Heading 9972 as "real estate services other than (i) and (ii) above" in Entry 16 of Notification No. 11/2017-Central Tax (Rate).

2.20 The supply attracts GST at 18% (9% CGST + 9% SGST), as applicable from time to time.

2.21 The liability to pay GST on the said renting service rests on the applicant (landlord) under the forward charge mechanism.

---