GST update No 207 on exemption on lease of premises for residential purpose by company’s staff

Applicability of tax on rental income has been a matter of debate since erstwhile service tax regime. The government has granted exemption from levy of tax on dwellings and premises used for residential purpose. However, the dispute arises as to admissibility of exemption on letting out of building to the company for residential use by its employees. One such issue in alignment with the above stated subject matter was raised before Maharashtra AAR in the case of M/S KASTURI & SONS. LTD. The decision delivered in this case is the subject matter of discussion of our present update.

The applicant is owner of properties having 22 residential apartments. The rental/license fee of which is fixed at the rate of Rs. 145/- per Sq. Ft. It is proposed to let out on leave and license basis the premises to M/s Life Insurance Corporation of India for residential purposes of its staff members. The question raised is applicability of Notification 12/2017-CT(Rate) dated 28.06.2017.

The applicant submitted that the premises are let out for residential purposes. Further, there is restriction for usage of the apartments let out under clause 4.1 of the Proposed Agreement. Therefore, it was contended that merely because of the fact that the apartments were let out to LIC, for residential usage of staff members, it cannot be treated as used for commercial purpose. It was submitted that as per S.No. 21 of the said Notification also, exemption is given to nature of property and its usage and not by the status of the recipient.

The revenue authorities argued that the staff to whom the apartments are let out can sit in office and work more. This, consequently, will increase the profitability of the company and productivity of the employee. Therefore, it is let of for commercial purposes and not for residential purpose. Therefore, it was argued that benefit of exemption notification should not be availed by the applicant.

The AAR analysed the situation and went through the documents on record and the submissions of the applicant and the respondent. It was held that as per the clause inserted in Agreement, there was specific restriction for usage of property for commercial purpose. It was stated that to proceed further, the said service is a supply of service and therefore, SAC code is to be identified. Furthermore, as per the Notification No. 12/2017 dated 28.06.2017 also, the entry exempts GST on residential dwelling used for the purpose of residence. Nothing related to whom the services are to be supplied is mentioned in the exemption notification. Further, the exemption is qua supply of service and no qua the recipient of supply. Therefore, the contentions of appellant were upheld stating that exemption is provided in nature of property and its usage and not by status of the recipient. The submissions of revenue department were quashed being illogical since no explanation was provided as to how the employees will sit up late for the office work when office hours are already defined. Reference was made to the decision of West Bengal AAR in the case of M/s Borbheta Estate Pvt. Ltd.

The above decision is an important ruling for the business community since in cities like Mumbai, residential flats are often provided by the companies to its key executives for their residential purposes. Had the ruling been adverse, the said service would have come within the tax bracket and landlord licensor would have charged GST at the rate of 18% from the company. The emphasis laid by AAR on the purpose of use of leased premises and focusing on the substance instead of the recipient is commendable. It is expected that the AAR continue to deliver such favourable rulings in future as well.

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GST update No 207 on exemption on lease of premises for residential purpose by company’s staff

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