DEPOSIT ON LEASE - ATTRACT GST OR NOT

[RV PERUMAL]

ONE OF MY CLIENT OCCUPIED (GST HOLDER)AN OFFICE ROOM, HE PAYS 5 LAKHS AS A DEPOSIT FOR THREE YEARS LEASE. THERE IS NO RENT PAID BY THE TENANT AND AFTER THREE YEARS COMPLETION, THE BUILDING OWNER SHALL REPAY THE AMOUNT AFTER IF ANY DEDUCTIONS. NOW MY QUESTION IS WHETHER GST CHARGED BY THE BUILDING OWNER (GST HOLDER) ON THE DEPOSIT AMOUNT OR GST IS EXEMPTED. PLEASE SUPPORT WITH ANY AAR OR OTHER EVIDENCES

[KASTURI SETHI]

SH.RV PERUMAL Ji,

What is the status of the element of interest on the deposit ? Notional or otherwise. Here interest notional or actual is also consideration for the purpose of tax.

[RV PERUMAL]

KASTHURIJI, ONCE AGAIN THANKS

NO INTEREST AGAINST THE DEPOSIT RECD FROM THE BUILDING OWNER

[HNA CharteredAccountants]

Advance rulings in the case of Midcon 2021 (1) TMI 554 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA (App. A.A.R. - GST - Kar.) and E-square 2019 (4) TMI 805 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA have held that GST is not applicable on notional interest. However, it is important to note that in those cases it was observed that amount of security deposit did not influence the price.

In the instant case, I believe that the amount of security deposit given has influenced the price and therefore, there may be requirement to discharge GST on the notional interest. In case of BEE AM INDUSTRIES PVT. LTD. - 2017 (5) TMI 468 - CESTAT NEW DELHI [although not exactly in the same context] it was held that notional rent needs to be subjected to service tax. This may have to be analysed in detail. Not paying GST on this transaction may be subject to litigation.

[KASTURI SETHI]

Sh.R.V. Perumal Ji,

In addition to above also go through the following decisions of AAR and AAAR (in favour of tax payer/registered person :-

(1) (Para Nos.6.9 and 8(2) MIDCON POLYMERS PVT. LTD. - 2020 (9) TMI 784 - AUTHORITY FOR ADVANCE RULING, KARNATAKA

(2) MIDCON POLYMERS PVT. LTD. Para Nos. 15 & 17(2). - 2021 (1) TMI 554 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA

[Altamush Zafar]

Where the deposit amount is to be returned then there is no GST on the deposit amount as it doesn't form part of consideration. Where in case the deposit amount is used for rent then that will be liable to GST.

[Shilpi Jain]

There would be no GST liability on the deposit as it is not forming part of consideration for the service provided.

also if it can be proved that the deposit has not influenced the amount of rent charged for the service, no requirement to add any notional interest also to the consideration for the purposes of paying GST

[Shilpi Jain]

Whether the deposit has influenced the rental amount or not can be proved by ascertaining what kind of deposits are taken by landlords for similar properties

AI Summary

Security deposit on lease not taxable under GST if refundable and not influencing rent; notional interest taxable if it affects consideration.
A refundable security deposit that is returned and does not influence rent does not form part of taxable consideration for GST; however, if the deposit affects the price charged or is used as or converted into rent, the deposit (including any deemed or notional interest) may be treated as taxable consideration, and advance rulings vary on the facts of influence and treatment.