GST liability on Recovery Charges

[Ethirajan Parthasarathy]

A person is registered under GST on account of Rent from commercial property.

In a particular year the Land Lord recovers a sum of say 2,00,000 /- towards damages and re-painting charges from the tenant.

My Query is whether such amount is liable to GST and also income tax.

[KASTURI SETHI]

Yes. GST is applicable on both considerations.

[Ethirajan Parthasarathy]

sir,

Normally the recovery is done at the time of tenant vacating. In such situation who is the receiver of repairs or repainting.service

Again,though the deduction is made from out going tenant, invariably no re painting is done.,

[KASTURI SETHI]

Dear Sir,

In my view, in this scenario, a person who receives the payment is service provider (supplier) and who makes the payment is the service receiver. Repair, re-painting etc. both will be covered under 'liquidated damages'. It is classifiable under Service Accounting Code Heading No. 9997 (other services, nowhere else classified). Notification No.11/17-CT(Rate) dated 28.6.17 (as amended) and serial no. 35 refer.

Also see Schedule II, Entry No. 5, Clause (e) of the CGST Act, 2017, the relevant portion is reproduced as under :

“agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;”

The outgoing tenant has made the payment for the repairs, repainting etc. Thereafter, the landlord gets the repair etc. done or not from any person; that is not relevant. This service is covered under Schedule-II at serial no.5 (e) read with above notification.

If we read above conjointly, such amount is taxable de jure.

In case the landlord/assessee can prove that such amount is compensation and not income, then that person has the basis for fighting the case in the court.

[Shilpi Jain]

Liquidated damages not liable to gst. There is a Bombay HC decision Bai Mamubai Trust - 2019 (9) TMI 929 - BOMBAY HIGH COURT. And a number of tribunal decisions under ST including HC

[KASTURI SETHI]

The question arises is whether these recovery charges are a compensation or not ? Whether these are LD charges are not ? In the given scenario, the landlord has provided renting service to the tenant and for that supply he has received the rent. It is an undisputed fact. Now it is the legal duty of the landlord to repair, maintain and renovate his own immovable property. Why should he charge from the tenant on the ground of repair, damage, re-painting etc. ? The said charges cannot be treated as compensation charges. It is not actionable claim. For example ; when we receive insurance claim from insurance co. on account of accident of vehicle etc., that is compensation charges. That is actionable claim.

In this scenario, such recovery charges are income and and hence consideration and liable to GST. Such charges may be considered as a kind of rental income as additional consideration on account of providing service of 'Renting of Immovable Property'.

In view above, Such charges are not compensation at all and no case law on LD charges passed in pre-GST era or post GST regime will help the service provider in his favour.

Since my views are pro-revenue, these may not be liked by the querist but these are based on legal position and hence impartial, unprejudiced and sincere.

To agree or not ; that is prerogative of the querist or the tax payer.

[Ethirajan Parthasarathy]

sir

Thanks for your detailed reply

[CA Hemanth Kumar]

Agreed with kasthuri sethi Sir,

Charged recovered may not be in the nature fo liquidated damages. Thereby gst will be applciable on the same.

[Shilpi Jain]

Taxability depends on how you maintain your documentation and for what reasons the amount is shown to be collected.

In case of damages there is a possibilty of keeping it out of levy.

AI Summary

GST on recovery charges: tenant payments for repairs may be taxable as additional consideration for renting immovable property.
Recoveries from tenants for repairs, repainting or damages, taken as additional consideration for renting immovable property, are treated as taxable consideration under GST when characterized as income; the key issue is whether the amount is compensation (potentially non taxable) or additional rental consideration, with documentary evidence and factual matrix determining taxability.