RCM on Rent Paid to landlords related to residential building used by the employees of the company

[Ashok G U]

Respected colleagues, We are a registered tax payer under GST. A private limited company engaged in manufacture business. We are paying rents to various unregistered landlords towards use of residential purpose buildings. These buildings are used by the employees of the company for their residential dwelling purposes.

Does the company is liable to pay GST under RCM as required by the Notification No Notification no. 05/2022-Central Tax (Rate) dated 13th July 2022?

If Yes, can the company claim the ITC of such taxes paid under RCM?

Thank you for the guidance.

[Raam Srinivasan Swaminathan Kalpathi]

Kindly note that if the expenditure is being claimed as a deduction in the Statement of Profit and Loss then GST @18% will have to be remitted on RCM as per Notification 05/2022 dt.13-Jul-22.  ITC can be availed as the facility is used or intended to be used in the course of furtherance of business .  The date from which this provision is applicable is 18-Jul-22.  Please remit GST with appropriate interest u/s. 50 and raise an RCM invoice and avail ITC.  Thanks

[Shilpi Jain]

GST would be applicable.

See if the employees can be reimbursed the rent rather than company taking on rent.

Taking ITC could be disputed by the department. So best suggested not to take if you wish to have a conservative and a dispute free stand.

[Narayan Pujar]

Employees of the company reside in rented premises & the rental agreement is in their names, & not in companys name. The rent is partially paid by both the company & the employees, and employees get reimbursed from the Company for their share.

Eg., Rent of 15,000 - rent of 11k paid by company to employee & 4k paid by employee from his own pocket and later 4k is reimbursed by company to employee. Eventually, employee pays rent to the landlord. There is no direct connection or agreement between company and the employee.  

The commpany will book the reimbursement transaction as an expense, so whether the GST under RCM will be applicable on it?

[KASTURI SETHI]

If ITC taken, SCN is certain on the ground of NOT conforming to the phrase ,"used or intended to be used in the course or furtherance of his business" laid down under Section 16(1).

Availment of ITC in this scenario is not litigation-free at all.

[Padmanathan KV]

Yes. RCM would be attracted in hands of the company. and ITC is also eligible.

As Shilpi ma'am suggested, try to pay as allowance to employee and let them take it on rent to avoid any possibility of litigation.

However, I am of the view that ITC cannot be denied as providing accommodation to employee is definitely "in the course or furtherance of business", albeit restrictive meaning given by AARs. 

The judgments of Hon'ble Courts in the context of section 37 of Income Tax Act examining the scope of the expression “laid out or expended wholly and exclusively for the purpose of the business or profession” can be a useful guide in this regard as it is in similar footing as "in the course or furtherance of business".

[Raam Srinivasan Swaminathan Kalpathi]

My practical experience:  One client exports captively software services to its holding company in USA.  Many times clients visit the Indian facility and stay in hotels.  We have not only availed ITC, but also claimed refund u/s.54 and department had processed the same without demur.

My suggestion to the querist would be (if they want to avoid litigation) would be to avail ITC and reverse the same in 3B Returns.  As and when favourable verdicts are elicited the said ITC can be availed as re-credit.  There is no time-line for re-credit.  Thanks and best wishes. 

[Raam Srinivasan Swaminathan Kalpathi]

By the by, ITC availed was only room accommodation charges that too if in the same state.

[Ashok G U]

Thanks to each one of your for your valuable inputs and guidance. Even if the residential property is used for residential purpose by the employees, payment of gst under RCM is applicable. If the GST registered tax payer takes residential property on rent whether they use it for office/godown/commerical or employees residential use , it doesn't make any difference. GST under rcm may not be applicable if its paid by employees themselves and later reimbursed by the company. Is this understanding correct to have a litigation free stand? Thank you

[Raam Srinivasan Swaminathan Kalpathi]

I do not subscribe to this stand.  To what account will the company debit the expenditure? If the same is debited to rent then RCM will be applicable.  If it is debited to salary then Income-tax provisions u/s.192 will kick in.  

[Padmanathan KV]

Ashok ji,

in case of renting for commercial purposes like godown office etc, supplier shall be liable to pay tax on forward charge. This is subject to reg provisions under section 22.

[Padmanathan KV]

Srinivas Kalpathi ji,

TDS is inevitable anyhow, isnt it? its either 194I or 192? Atleast RCM aspect can be planned by tweeking employment contract to avoid ITC litigation, imo.

[KASTURI SETHI]

ITC is not litigation-free. None likes horrors of litigation. 

[Raam Srinivasan Swaminathan Kalpathi]

Thanks for reminding Sec.194I Sh.Padmanathan.  Nevertheless, the slab rates vary widely.  This aspect also has to kept in mind.  Your point is well taken.  Regards

[Amit Agrawal]

Providing 'rental accommodation' to the employee as part of perquisites agreement (i.e. as part of employer-employee agreement), is definitely as input services for employer which are used or intended to be used in the course or furtherance of his business and thereby, ITC should be available u/s 16(1) IMHO. 

For 'Service by way of renting of residential dwelling to a registered person', the 'registered person' as service-receiver is liable to pay to gst under RCM. 

Only issue here is whether bar on ITC for such employer (for such gst paid under RCM) u/s u/s 17 (5) (g) applies or not? 

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

[Amit Agrawal]

My view is that such ITC can still be claimed and bar on ITC u/s 17 (5) (g) will not apply when such residential dwelling is used by an employees for his own home-accommodations. Some of reasoning for the same is as follows:

A. Prior to 01.02.2019, ITC was specifically disallowed as per then prevalent Section 17 (5) (b) which reads as follows:

"(b) the following supply of goods or services or both:-

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre;

(iii) rent-a-cab, life insurance and health insuranceexcept where ––

(A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or

(B) such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and

(iv) travel benefits extended to employees on vacation such as leave or home travel concession;"

B. The way I see this is that prior to 01.02.2019, to deny ITC against any inward supply - which is used for personal consumption by an employee - there were TWO specific situations:

I) ITC was denied on some specified inward-supplies (such as 'food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery) used by employees provided that 'the Government has NOT notified such services as obligatory for an employer to provide to its employees under any law for the time being in force'.

II) ITC was denied on travel benefits extended to employees on vacation such as leave or home travel concession, whether or NOT the Government notifies these services which are obligatory for an employer to provide to its employees under any law for the time being in force. This was blanket exclusion prior to 01.02.2019.

C. So, prior to 01.02.2019, there were TWO specific situations specified under same sub-section 17 (5) for any inward supply where 'personal consumption by an employee is the main angle to deny ITC' and one of those situations was blanket exclusion from ITC specifically dealing with supplies related to "travel benefits extended to employees on vacation" (which is as much a personal consumption by an employee and IF NOT MORE, as the issue under consideration). Hence, Section 17 (5) (g) should not be read into as dealing with a case of "personal consumption by an employee". Said restriction is only for "personal consumption by tax-payer assessee IMHO".

C1. In other words, if Section 17 (5) (g) also covers "personal consumption by an employee" to deny ITC, there was no need to put clause (iv) (i.e. travel benefits extended to employees on vacation such as leave or home travel concession) in Section 17 (5) (b).

D. Post 01.02.2019, main changes (in the context of this discussion) in above-said Section 17 (5) (b) was that ITC against every inward supplies specified therein is allowed if it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

E. But, again, that also means that ITC against 'all specified inward supplies u/s 17 (5) (b)' will not be available when employer provides them to employees without any statutory obligation under law. And those specified inward supplies u/s 17 (5) (b) does not include 'Renting of Residential Dwelling Services' but continues to include "travel benefits extended to employees on vacation" and "Renting or hiring of Motor Vehicle".

F. Above arguments needs to be supported by demonstrating the facts to prove that such 'residential dwelling' fulfills other business-needs such as getting most-suitable employees who are not having own home in either in same city or in the vicinity of tax-payer's place of businesses where such employee is working etc. In other words, these services can be seen as 'personal consumption' from point of view of an employee but they are are not 'personal consumption' from point of view of the tax-paper assessee.

Hence, my view is that ITC against 'Renting of residential dwelling is used by an employee for his own home-accommodation' can still be claimed and bar on ITC u/s 17 (5) (g) will not apply.

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

[Amit Agrawal]

Now, kindly allow me to explain 'counter arguments' & my views therefor:

Subject Section 17 (5) starts as follows:

"Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

& then followed by clause (a) to (i)"

So, it is possible to argue that in view of non-obstinate sub-section followed by words 'input tax credit shall not be available in respect of the following', sub-clauses (a) to (i) should be read into as independent of each other. So, even if any inward supply fouls with any one of sub-clauses (a) to (i), ITC is not available u/s 17 (5).

Hence, one can argue that sub-clause (g) does not talk about 'personal consumption" by whom and subject transaction fouls with restrictions under sub-clause (g) to deny ITC.

My personal views about this counter argument are as follows:

A. Due to reasons explained in my earlier post, sub-clause (g) does not cover "personal consumption from point of view of an employee" - in given situation - in my view.

In other words, as subject inward supply - under discussion here - does not fouls with any one of sub-clauses (a) to (i) of Section 17 (5), ITC cannot be denied using Section 17 (5).

B) If such counter argument is to be held as correct, then, ITC against 'all specified inward supplies u/s 17 (5) (b)' will not be available EVEN WHEN employer provides them to employees under any statutory obligation under law as all these specified input services can also be called as 'used for personal consumption' by the employees. IMHO, such possible interpretation (i.e above-said counter argument) is legally not sustainable. 

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

[Amit Agrawal]

Now, I have given my views and reasoning about ITC in my two earlier posts, here is some more food for thought/s for all readers as well as contributors on TMI:

Does harmonious interpretation requires to 'exclude' those ITC which is specifically allowed in sub-clause (b) while denying ITC under clause (g)? But, is this harmonious interpretation argument to deny subject ITC under discussion is contrary to original argument explained my post no. 14?

Moreover, how one applies harmonious interpretation rule for position prior to 01.02.2019 where blanket exclusion from ITC was there for supplies related to "travel benefits extended to employees on vacation" even when same was obligatory on the employer (which is as much as a personal consumption by an employee and IF NOT MORE, as the issue under discussion here) under sub-clause (b) while sub-clause (g) was also present?

OR, does this mean that changes made effective from 01.02.2019 in sub-clause (b) changes interpretation of clause (g) when there is no changes made in clause (g)? Is this really possible and if yes, how & since when (i.e. since 01.07.2017 or since 01.02.2019)?

I would request willing professionals on this forum to raise & deliberate all connected issues taking into account the both sides of views. This may help in arriving at some consensus or at-least find all the weak links in every argument/s for both possible view/s.

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

[Raam Srinivasan Swaminathan Kalpathi]

Sh.Padmanathanji, I am withdrawing the acknowledgment of statement that I made that TDS is applicable on rent and salary and that I missed the point.  The clarification is - if the payment for the guest house is directly to the landlord and rent is debited in the statement of profit and loss then TDS is borne by the landlord and not by the tenant.  However if the rental portion is included in the CTC of the employee then the company will have to gross up and bear the TDS from its pocket and believe me the amount can be quite significant.

I would therefore strongly recommend to the querist to pay GST on RCM on guest house rent and avail ITC.  The said RP can reverse the ITC in the same month and wait for favourable decisions from courts.  Once the courts confirm eligibility to avail ITC the RP can recredit ITC in that months 3B.  Thanks

[Sadanand Bulbule]

Dear all

I request all the contributors:

Let the experts answer the questions rather than questioning the answers to enhance the beauty of this platform. After all answers come from individual perception. There is no one who can give perfect answers. And even the Supreme Court rulings are not capable of being infallible. Pride lies in appreciating the efforts and not the product.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, I agree with your views in toto. If your suggestions are translated into practice by all the experts, the readers will not be a victim of confusion. Thus a crystal clear concept will emerge which will be in the interest of all and , in turn, will pave the way for avoidance of the rigours of litigation. This is also one of the objects of TMI behind creating this forum free of charge otherwise nothing is free in this world. Every service has inherent cost.

[Amit Agrawal]

'Giving own interpretation of law with solid reasoning as well as disagreeing with a contrary view/s by giving detailed justification & reasoning for disagreement' is basic necessity for having quality discussion. Otherwise, it will be impossible to meaningfully contribute on such public discussion forum.

All querists on TMI forum and its visitors needs comprehensive view of various facets of any controversy under discussion and legal justification / reasons for both sides of any argument wherever there is disagreement among contributors.

While all these views are, no doubt, opinions & not judgements, all querists on TMI forum and its visitors have a right or expectation to see "quality discussion". And that "quality" cannot come unless disagreement/s and legal reasoning for disagreement is openly & minutely discussed.

Hence, wherever time permits, I intent to continue making meaningful contributions on this discussion forum.

AI Summary

GST Reverse Charge on Unregistered Landlord Rent: Navigating Compliance and Input Tax Credit for Employee Housing Facilities A manufacturing company seeks guidance on GST reverse charge mechanism (RCM) for rent paid to unregistered landlords for employee residential buildings. The key queries involve potential GST liability under Notification 05/2022 and the possibility of input tax credit (ITC) for taxes paid under RCM for such residential premises used by employees.