GST on rent received from building which is constructed from loan advanced by tenant

[Jai Shankar]

In 2016, Tenant A advanced loan of Rs. 36 lakhs to Landlord B for construction of building. After construction, the building was let out to Tenant A at monthly rent of Rs 1 lakh for 3 years from 2017 to 2020. The rent payment was adjusted against the loan dues of Rs. 36 lakhs. Landlord B did not register himself under GST as the 36 lakhs received by him was not income liable to GST but in nature of loan. The Department has issued notice to Landlord B for (a) not registering himself under GST since 36 lakhs received is in the nature of advance rent and crossed the threshold limit of 20 lakhs and not paying 18% GST on entire amount of Rs. 36 lakhs. Landlord B is contending that when advance was received the building itself was not ready - how can it be advance rent? Rent will start accruing from date of occupancy and liability can be discharged on monthly basis on Rs. 12 lakhs per annum rent - also he has no other income other than this and since 12 lakhs is below threshold limit for registration, where is the need to register under GST? Quite an interesting case. Opinions, thoughts and suggestions are most welcome.

[Shilpi Jain]

What is important is how the agreement is structured.

If it is mentioned clearly that 36L is loan which will be repayed by way of deduction from monthly rentals until occupied by tenant, then in my view it is a loan only.

In other case, if it is mentioned as an advance rent then department contention is correct.

[Amit Agrawal]

Dept's contention is untenable even if Rs. 36 Lacs was received as 'advance' for rent in year 2016.

This is because service tax was payable on such advance and same is excluded from GST due to Section 142(11)(b) of the CGST Act, 2017. And raising any demand for service tax now is patently time-barred.

P.S. Nine Member Constitutional Bench of Supreme Court's ruling is awaited where one of issues under dispute is 'levy of service tax on renting of immovable property'. 

These are ex facie views of mine and the same should not be construed as professional advice/suggestion.

[Padmanathan KV]

Agreed with the views of expert.  From the agreement between the parties, it is evident that 36 lakhs is loan, then GST/ service tax cannot be attracted.

However, providing building on rent shall be supply of service under GST since 'consideration' is by way of repayment towards loan.  However, registration shall be subject to provisions of section 22.

AI Summary

GST treatment of rent adjusted against tenant advanced loan depends on agreement; classification affects registration liability. GST characterisation depends on the contract: if the 36 lakh payment is documented as a loan repaid by deduction from future rent it is not advance rent and not taxable as such; if described as advance rent the department's position is tenable. Transitional exclusion of certain advance receipts from GST may preclude fresh GST/service-tax demands. Provision of the building against repayment-by-deduction is a taxable supply, but registration depends on the turnover threshold and statutory registration rules.