GST RCM on rent-applicability in the case of property taken on lease

[Prashanth G]

One of the clients- a dealer registered under GST- is running his business in a shop taken on lease for 8 years by paying Rs 8 lakhs as the lease amount. As per the terms of lease, this amount will be refunded by the Lessor after the lease period.

Whether GST RCM on rent is applicable on this case? If yes, how to calculate monthly rent / RCM?

[RAHUL MODI]

1. GST on Refundable Security Deposit

As per Section 2(31) of the CGST Act, 2017, a security deposit is not considered as consideration unless it is adjusted against rent or forfeited.

• If fully refundable and does not influence rent → No GST applicable.
• If adjusted towards rent → GST at 18% applies on adjusted amount.

2. Notional Interest on Security Deposit

• The Karnataka AAAR ruling in Midcon Polymers Pvt Ltd (2021 (1) TMI 554 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA) held that notional interest on a security deposit is taxable only if it influences the rental value.
• If rent is at market value and remains unaffected by the deposit, notional interest is not included in taxable supply.

3. RCM Applicability on Rent

• If the lessor is registered under GST: The lessor will charge 18% GST on rent.
• If the lessor is unregistered: The lessee must pay GST under RCM @18% on rent.
• RCM does not apply to refundable deposits unless adjusted against rent.

Suggestions & Compliance Measures:

✔ Clearly state in the lease agreement that the deposit is refundable and does not affect rent.
✔ If the deposit impacts rent, compute notional interest and include it in taxable value.
✔ Pay GST only on rent, not on the deposit, unless adjusted or forfeited.

The applicability of GST should be reviewed on a case-to-case basis considering the lease terms and judicial precedents. 🚀

[Prashanth G]

Dear Sir, Thanks for the reply.

[Ganeshan Kalyani]

Such arrangement is called as 'Pagdi' system in Maharashtra. Also called as heavy deposit rental home. Since, it is not rent as such and only a deposit refundable on termination of contract, GST is not applicable on lease amount.

[Sadanand Bulbule]

Beautifully clarified Sir

[Prashanth G]

The question posted started when reading an explanation of Notification No. 16/2018-Integrated Tax (Rate) wherein it was stated that “renting of immovable property” means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property. 

That is to say leasing also comes in the ambit of the definition of renting of immovable property.

Please throw more light on this.

[Shilpi Jain]

Leasing and renting are almost synonymous.

In case there is taxability, valuation has to be done as per rule 27, i.e. adopting open market value for the rent. Do not consider notional interest as the taxable value.

[Prashanth G]

Thank you Madam.

[KALLESHAMURTHY MURTHY K.N.]

Dear sir,

Very well analysis by  RAHUL MODI. 

AI Summary

Reverse charge on rent applies when lessor is unregistered; refundable deposits taxable only if adjusted against rent.
A refundable security deposit that does not influence rent is not taxable; if adjusted against rent or forfeited it becomes taxable as rent. Notional interest is taxable only when it affects rental consideration. If the lessor is registered, the lessor charges GST on rent; if unregistered, the lessee pays tax under the reverse charge mechanism. Refundable deposits are excluded from reverse charge unless adjusted to rent. Lease agreements should state refundability and non-impact on rent and valuation should follow market-value principles when taxability arises.