Applicability of GST on rent recovery amount from Employees

[Ramanathan Seshan]

Dear Experts,

I hope this message finds you well.

I seek your insights regarding the legal position concerning housing rent recovery from employee's salary in the following scenarios:

1. Company A (manufacturing entity) has rented an entire apartment from a landlord and provides it to its different employees for accommodation. The rent amount is deducted from the employees' salaries without any markup charged by the company. What is the legal position on this situation? Should the employee raise an tax invoice for such recoveries, if so, at what rate of tax? Are there any necessary disclosures in the GST return that must be made, and if so, under which table should these disclosures appear?

2. In a variant scenario where the employer charges a markup (say as a service charge or facilitation charge) on the rental amount, how does this affect the legal stance and disclosures? Should there be a separate invoice to be raised for the mark up?

Regards.

S Ram

[Raam Srinivasan Swaminathan Kalpathi]

My opinion would be as follows:

1)  If the landlord is imputing GST on the rental supply invoices raised on the employer company ITC will not be available.  If the landlord is not charging GST on the supply bills the employer company will have to remit GST on RCM as per Notification 13/2017-CT (rate) w.e.f.18-Jul-22.  Here again ITC will not be available.  The amount collected from the employees will not have a GST component in lieu of Circular 172 dt.06-Jul-22.

2)  ITC will be available to the employer but employer has to charge GST on the employees for the full amount and not the margin. 

Thanks

[Ramanathan Seshan]

Dear Raam-sir,

Thanks for your response. Can you please clarify on the additional points below:

1. Whether there is requirement from employer to report in GSTR-1 ?

2. In the second point mentioned by you, can you please clarify if we can avail ITC ?

Regards,

S Ram

[Raam Srinivasan Swaminathan Kalpathi]

Clarification on:

Point 1 - Yes - once identified as falling within the provisions of Sec.7 - scope of supply, reporting in GSTR-1 is mandatory.

Point 2 - ITC will be available as the inputs services are subjected to GST and the supply is for furtherance of the main business.

[Ramanathan Seshan]

Dear Raam-sir,

Thanks for your swift response. Can you please clarify on the below:

1. At what rates of taxes should the reporting be done ?

2. At what point does it become supply ?

3. Wrt to point 2, should we show it as an exempt supply ?

Regards,

S Ram 

[Raam Srinivasan Swaminathan Kalpathi]

Rate of tax will be 18% and SAC 997212

Upon completion of service and invoice to be raised within timeline provided in Rule 47

Please appreciate that if you are collecting the exact amount then it is not a supply but a perquisite and outside the scope of supply - please go through Circular 172 para 5.  Only if a margin is kept would the entire transaction fall within the scope of Sec.7

[Ramanathan Seshan]

Thank you very much Raam sir

[KALLESHAMURTHY MURTHY K.N.]

Sir,

The query has two distinct transactions. The supply of service from the apartment owner and the supply of service to the employees. The apartment is rented for the use of employees and not for the Company. Therefore the rent paid by the company is for a third party, Such payment attracts GST but not in the furtherance of business. Therefore, not eligible for ITC. Providing building to the employees is another nature of supply of service. So, there is tax liability. The tax paid in this scenario is eligible for ITC. 

There are Advance Rulings for similar situations. M/s Kothari Sugars and Chemicals Limited (2023 (7) TMI 525 - APPELLATE AUTHORITY FOR ADVANCE RULING, TAMILNADU)

M/s Tata Motors Limited [2020 (9) TMI 352 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA] AAR Maharashtra.

[Ramanathan Seshan]

Dear Murthy-sir,

Thanks for your valuable input. I shall read the rulings and revert to you in case of further queries.

Regards,

S Ram

AI Summary

GST on employee rent recovery: reimbursements without markup may be outside supply, markups create taxable supply requiring invoicing. GST on employer recoveries hinges on transaction characterisation: reimbursements of landlord rent collected without markup are treated as pass-through perquisites outside the scope of supply and carry no GST; if the landlord charges GST employer cannot claim ITC, and if landlord does not charge GST the employer may have reverse charge liability with limited ITC. When the employer imposes a markup, the employer makes a taxable supply to employees, must invoice and discharge GST on the full amount, report it in outward returns, and may claim ITC subject to normal conditions.