29 September 2024

Introduction:
In an effort to stop revenue leakage, the 54th GST Council meeting recommended on September 9, 2024 to apply the Reverse Charge Mechanism (RCM) to the renting of commercial property given by an unregistered person to a registered person. Such recommendation produces several questions such as what does the word ‘property’ include, what is included under ‘commercial property’, the implications on past cases as presently no GST is being charged on renting of commercial property by an unregistered person to a registered person. This article attempts to evaluate this matter.
Note – This article is based on the press release release from the 54th GST Council Meeting. On this issue, the CBIC has not yet released a Notification.

1. Excerpts of 54th GST Council Meeting:
As per the recommendations made during 54th meeting of GST Council, it has been clarified as per below:
“To bring renting of COMMERCIAL PROPERTY by unregistered person to a registered person under Reverse Charge Mechanism (RCM) to prevent revenue leakage.”

2. Issues at hand
Issue No. 1: Can GST be levied on ‘Rent’ in light of the provisions of the Constitution of India?
Issue No. 2: If only renting of commercial property is being brought under Reverse Charge Mechanism, what exactly is the scope of coverage under ‘commercial property’?

A. Whether the meaning of commercial property is confined to only commercial land and building?
B. What shall be the implication for renting the industrial land and building, how can a distinction be made between commercial and industrial properties?

C. Whether warehouses are to be considered as commercial or industrial property? Could warehouses be considered commercial property due to their potential for revenue generation and their use in business?

D. Whether machinery is also to be considered as commercial property since it is used for commercial purpose aiding in the furtherance of business activities?

Issue No. 3: What shall be the implication of this recommendation on claiming of ITC?
Issue No.4: If a director (unregistered person) rents out a commercial property in his personal capacity to registered person whether GST under RCM is applicable or not?

Issue No. 5: If hostel accommodations are rented out to a registered person by an unregistered person who further rents it to students, in such cases, do we consider hostel accommodations given to students to be residential or commercial property?
Issue No. 6: What if a residential property is given out on rent for commercial use (like PG, Hostel etc.), should such transaction also be taxable under Reverse Charge Mechanism solely on the grounds that the use of such property is commercial in nature? What if a commercial property is used for residential purpose?
Issue No.7:  Would GST on hotel accommodations also be charged on RCM basis?
Issue No.8:  In case of commercial shops located within precincts of a religious place being given out on rent by the trust owning it, who is an unregistered body, to a registered person, shall GST on such rent be applicable on RCM basis?
Issue No. 9: When a leave and license agreement is entered for letting out of a commercial property, shall the same also be chargeable to GST under RCM? Such question arises since Section 7 (1) (a) of the CGST Act, 2017 (the scope of supply), states that supply also includes license, rental, lease, differentiating the three as separate forms of supply.

3. Issue No. 1 – Can GST be levied on ‘Rent’ in light of the provisions of the Constitution of India? What is the present position under GST Law for this issue?
Note: Constitutional aspect is discussed in Para 3 and statutory aspect is discussed in Para 4.

The constitutional validity of GST on rent is a pivotal issue that delves into the core of India’s taxation framework. At the heart of this debate is the interpretation of Article 246A of the Constitution, which grants the power to levy GST on the supply of ‘goods and services’. The contention arises from whether leasing or renting property constitutes a “service” and thus falls under the purview of GST. Critics argue that such transactions should be governed exclusively by state legislatures under Entry 49 of List II of the Seventh Schedule, which pertains to taxes on immovable property. This issue has significant implications for application of GST laws in India.
3.1 In case of Myrayash Hotels Pvt. Ltd. vs. Union of India & Ors., The Bombay High Court received a Writ Petition filed by Myrayash Hotels Pvt. Ltd. (Petitioner) that challenged the Constitutional Validity of Para 2 and Para 5(a) of the Schedule II of CGST Act, 2017 and the Goa GST Act, 2017.

3.2 The petitioner stated that as per Article 246A of the Constitution of India, only ‘goods and services’ are leviable under GST.

3.3 Petitioner states that
• In case of a lease/rent agreement, the landlord/lessor does not provide any ‘service’ to the tenant/lessee. Hence, GST cannot be applied to the same.
• According to Entry 49 List II of the Seventh Schedule of the Constitution of India, only State Governments have the power to impose taxes on transactions involving immovable property. Therefore, lease/rent transactions are not subject to GST as per Article 246A of the Constitution of India.
• The petitioner claimed that when a landlord leases/rents out a property to a tenant, the landlord relinquishes all rights and enjoyment of that specific property to the tenant for the duration specified in the agreement.

3.4 As per the Bombay High Court’s decision,
The Parliament possesses broad powers under the residuary power of legislation. The Court recognized that the Parliament operated under the assumption that there is a service component in the leasing of land. Therefore, since the Service Tax was enacted under the residual power of the government, it was not permissible to challenge the Parliament’s assumption as long as the tax did not fall under List II of the Seventh Schedule.
3.5 Petitioner challenges the order issued by Bombay HC along with constitutional validity of GST on lease/rent
The petitioner challenged the order passed by the Bombay HC along with the constitutional validity of GST on lease/rent. The petitioner filed a Special Leave Petition (SLP) with the Supreme Court of India, and the court granted leave to hear the petitioner’s appeal and decided to admit the appeal as well. The Appeal was instructed to be listed before the 9 Judges’ Constitution Bench of the Supreme Court of India and to be connected with Civil Appeal No. 4487 of 2010.
In the aforementioned Civil Appeal, the Supreme Court, through its order dated April 5, 2018, directed that since the interpretation of Entry 49 of List II of the Seventh Schedule of the Constitution of India is pending before the Bench, matters related to service tax should also be listed before the same Bench.
The Supreme Court, while hearing the SLP and Civil Appeal No. 4487 of 2010, directed that the matters should await the decision of the nine-judge bench in the case of Mineral Area Development Authority and Others vs. Steel Authority of India and Others. The Court noted that the scope of Entry 49 of List II of the Seventh Schedule of the Constitution of India is under consideration by the larger bench. Consequently, the hearing of these matters will resume once the larger bench delivers its judgment, allowing the parties to present additional relevant points. The SLP was deferred until the resolution of the issues pending before the bench in the case of Mineral Area Development Authority and Others.

Observation-

In view of the above case, it is interesting to note that the question of whether or not tax should be charged on rent, itself is being reviewed currently before the Hon’ble Supreme Court of India.

Presently, GST is being levied on supply of renting services of commercial property (by a taxable person to a registered/unregistered person) under Forward Charge Mechanism and now in latest development GST (Post issuance of notification to bring the recommendation of 54th GST Council Meeting in reality) shall also be imposed on renting of commercial property by an unregistered person to a registered person under Reverse Charge Mechanism as recommended by the GST Council.

Subject to the above contemplation pending in the forum of Apex Court, the discussion on various aspects of GST on the rent under GST Law is being discussed here below.

4 Before delving deeper into this topic, let us first take a look at the existing provisions to understand whether the renting of property is leviable under GST Act.

To be chargeable under GST, such renting activity should first amount to as supply.

Whether renting activity constitutes as supply and further is it to be treated as supply of goods or supply of services can be understood by reading of the following relevant provisions-

4.1 Section 7 of CGST Act, 2017 – Scope of supply

Section 7 (1) (a):

“7. Scope of supply. — (1) for the purposes of this Act, the expression ―supply includes–
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;”

Section 7(1A):
“(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.”

4.2 Para 2 of Schedule II of the CGST Act- Activities or transactions to be treated as supply of goods or supply of services

“(a) any lease, tenancy, easement, licence to occupy land is a supply of services;
(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.”

Observation:

• Words ‘Lease’, ‘license’, ‘letting out’, ‘tenancy’, ‘easement’ are used separately (nevertheless all these are treated as supply of services).
• It may be noted that Press Release of 54th GST Council Meeting refers to the word ‘Rent’ only.

5. Issue No. 2 –If only renting of commercial property is being brought under Reverse Charge Mechanism, what exactly is the scope of coverage under ‘commercial property’?

• Para 2 of Schedule II of the CGST Act specifies that lease or letting out of building including a commercial, industrial or residential complex for business or commerce shall be treated as supply of services.

• It can be observed that a clear distinction has been made in the nature of property being commercial or industrial. While as per the Act, there has been made a distinction in nature of property being ‘commercial’, ‘industrial’ or ‘residential’, the press release only specifies commercial nature property. Hence a question arises as to what constitutes as commercial property since the same has not been defined under the CGST Act/SGST Acts.

• It may be observed that the term ‘commercial property’ has not been defined under GST Act. This notion is formed of 2 words i.e. ‘Commercial’ and ‘property’. As per Merriam-Webster Dictionary, the word ‘commercial’ means occupied with or engaged in commerce or work intended for commerce and the word ‘property’ means an object or objects that belong to someone/something owned or possessed. The notion of commercial property signifies the concept of ‘commercial asset’ which infers that any commercial asset (be it movable or immovable!!) could be the subject matter of this amendment!! Crazy!!

• This raises the question of whether industrial property/complex/building etc. used for business purpose comes under the definition of commercial property also making it chargeable to GST under Reverse Charge Mechanism.

• Further, in case of renting of machinery by an unregistered person to registered person, can machinery also be viewed as commercial property since it is used for commercial purpose in furtherance of business activity? It shall be imperative to note on the issue of circular based on this recommendation, whether the use of word ‘commercial property’ can be construed to mean only real estate used for business activities or shall it also include business assets such as machinery. Accordingly, shall renting of machinery come under the purview of this recommendation?

6. Issue No.3 – What shall be the implication of this recommendation on claiming of ITC?
When recipient of such services is not eligible to claim ITC, this change will bring an additional cost.

Say for example,
Shri Sanjay Tiwari, an unregistered person from Rajasthan rents out his owned commercial premises to a registered restaurant ‘The Raju Baman’ in Mumbai. The premises has been rented out at a monthly rent of INR 95,000 and GST rate is 18%. Hence, ‘The Raju Baman’ is liable for paying GST liability of ₹17,100 (18% of 95,000) directly to the government under the RCM.

GST rate on restaurant services is 5% without the claim of ITC. Since ‘The Raju Baman’ charges 5% GST on its services, it cannot claim any ITC and subsequently it also cannot offset the GST of INR 17,100 it has paid on rent against its GST liability on restaurant services.

Similarly, any registered recipient whose further outward supply is ineligible for claiming of ITC, or is an exempt supply, would have to pay tax on the rent expense under Reverse Charge Mechanism without being able to claim any ITC. This brings an additional liability on the shoulders of such registered recipients.

7. Applicability of GST on Renting of Commercial Property- what has been the story so far? Let us take a look at the timeline-

On the question of applicability of GST on RCM basis for supply of such services by an unregistered person, is discussed below in reverse chronological order starting with the current situation leading back to the past situation.

7.1 Proposed Position-GST applicability before and after the said recommendation on Renting of Commercial Property-

Sr. No	Registration status of Supplier	Registration status of Recipient	Existing position	New Position (Once the change is notified)
1.	Registered Person	Registered Person	FCM	FCM
2.	Registered Person	Unregistered Person	FCM	FCM
3.	Unregistered Person	Registered Person	No Tax	RCM
4.	Unregistered Person	Unregistered Person	Not Applicable	Not Applicable

• Understanding with the help of illustration-

Mr. Krishna is an unregistered person residing in Delhi and owns a commercial apartment in Mumbai. He rents out such property to Mr. Ankit Raipuria at a monthly rent of INR 90,000. Mr. Ankit Raipuria is a registered person having his registration in state of Maharashtra.

The place of supply shall be the location of the commercial apartment, i.e. Maharashtra and since the owner and the commercial apartment are located in different states, this shall be an inter-state supply with GST rate of 18% (IGST) being applicable.

As per the proposed change, The GST on such transaction shall be levied on Reverse Charge Mechanism. Accordingly, Mr. Krishna being the unregistered owner, shall receive only the rent amount of INR 90,000 while the tenant Mr. Ankit Raipuria, being registered recipient is liable for paying the GST of ₹16,200 (18% of 90,000) directly to the government. Mr. Ankit Raipuria can claim the ₹16,200 GST paid as ITC.

 

7.2 Present Position (For period 1st February 2019 till date):

In case of renting of commercial property by unregistered person (Owner) to registered person (tenant), such services although taxable in nature, had not been notified till date under Reverse Charge Mechanism but is being brought so (Notification is yet to be issued), based on the recommendation of the GST Council.

7.3 Earlier Position
7.3.1 From 1st July 2017 till 12th October 2017:

As per Notification No-08/2017, Central tax (Rate) dated 28th June, 2017 the Central Government, under section 11(1) of the Central Goods and Services Tax Act, 2017, exempts intra-State supplies of goods or services received by a registered person from unregistered suppliers from central tax under section 9(4). However, the exemption does not apply if the aggregate value of such supplies exceeds ₹5,000 in a day. This notification took effect from July 1, 2017.

In our case of renting of commercial property, rent is usually charged on a monthly basis by the landlord. Hence, the limit of ₹5,000 in a day could be interpreted as ₹ 1, 50,000 in a month (an example for the simplicity) meaning that intra-state supply of renting service by unregistered person to a registered person had been exempt unless the monthly rent exceeded ₹ 1, 50,000 in a month (Considering that it is an only supply from unregistered person in a month).

7.3.2 From 13th October, 2017 to 31st January, 2019
The blanket exemption from RCM for purchases from unregistered persons was given (with no limit of Rs. 5000) which can be understood by the combined reading of the following notifications-Notification No.38/2017-Central Tax (Rate) dated 13.10.2017, Notification No.10/2018-Central Tax (Rate) dated 23.03.2018, Notification No.12/2018-Central Tax (Rate) dated 29.06.2018, Notification No.22/2018-Central Tax (Rate) dated 06.08.2018.

8. Issue No.4- If a director rents out a commercial property to registered person in his personal capacity whether GST under RCM is applicable or not?
According to Entry No. 6 of notification No. 13/2017-CTR, dated 28.06.2017, tax on services supplied by a director to the company or body corporate must be paid by the company or body corporate under RCM.
Reading of CIRCULAR NO. 201/13/2023-GST [F. NO. 190354/133/2023-TRU]
The circular addresses whether services supplied by a director in their personal capacity, such as renting immovable property to the company, are subject to the Reverse Charge Mechanism (RCM).
Circular clarifies that this provision applies only to services provided by the director in their official capacity as a director and not in personal capacity.
Therefore, services supplied by a director in their personal or private capacity, such as renting commercial property to the company, are not taxable under RCM. Only those services that are provided by the director in their capacity as a director of the company or body corporate are subject to RCM.

But in view of the recommendation of 54th GST Council Meeting, if a director (unregistered person) rents out a commercial property to the company or body corporate (registered person) of which he is a director in his personal capacity, it shall be subject to GST under Reverse Charge Mechanism. (We reiterate that the Notification is yet to be issued and this will be a separate entry and not to be covered by Entry No. 6 of notification No. 13/2017-CTR, dated 28.06.2017.)

9. Issue No.5 – If hostel accommodations are rented out to registered person by an unregistered person who further rents it to students, in such cases, do we consider hostel accommodations given to students to be residential or commercial property?
Note: It may be noted that the press release has not put any stress on what should be the usage of the property, whether it should be used for residential or commercial purpose. Actually, this point is mix of the matter of fact and matter of law.

So far, we have dealt with applicability of GST on commercial property. Looking from a different perspective, do we consider hostel accommodations given out on rent to students to be residential or commercial property?
This is with emphasis on the initial supply of renting services by unregistered owner to a registered person (first tenant), where the first tenant is further providing it to the students (second tenant, who are unregistered).
Say, Mr Bhavesh Singhvi (Unregistered person) has given a commercial property on rent to Mr Ashok Nahta (Registered person) on rent of INR 200000 per month. Mr Ashok Nahta gives this property on rent for hostel purpose to students. Mr Ashok Nahta is liable to pay GST on RCM basis on INR 200000 as per the amendment. Property used for hostel purpose cannot be treated as residential dwelling blindly and eventually it is the character of the property which is to be seen. Therefore, if hostel is run on a residential property, this amendment will not bring the GST liability on RCM basis as per this amendment. See the clarification below for the latter case.

Issue No.6 – What if a residential property is given out on rent for commercial use (like PG, Hostel etc.), should such transaction also be taxable under RCM solely on the grounds that the use of such property is commercial in nature? What if a commercial property is used for residential purpose?
Also, there are numerous cases where residential properties are used to provide accommodation services such as hostels and paying guest (PG) facilities. Is it permissible to operate hostel and PG services on residential properties? Even if it is, the given clarification still would not apply to such transactions, as merely using the property for commercial purposes does not change its residential status.
It is pertinent to consider whether usage of property defines the nature of the property. The classification of a property as ‘residential’ or ‘commercial’ is determined by the inherent characteristics of the property, a decision within the purview of the respective land regulator, generally which is the State Government. Authors are of the view that the usage of a property does not determine the nature of the property rather it is the inherent characteristics of the property. So, see the property papers!!
For example, if you build a house on a farm land, the status of the land does not change to residential simply because it is used for residential purpose. It shall still be considered an agricultural land only.

10. Issue No.7 – Would GST on hotel accommodations also be charged on RCM basis?
If a hotel is viewed as a commercial establishment and is unregistered under GST, will GST have to be paid on a reverse charge mechanism basis?
As per Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017 explanation for the purpose of this notification, point no (xxxiv), “’Hotel accommodation’ means supply, by way of accommodation in hotels, inns, guest houses, clubs, campsites or OTHER commercial places meant for residential or lodging purposes including the supply of time share usage rights by way of accommodation.”

As per Notification No. 20/2019- Central Tax (Rate) dated September 30th, 2019 GST rate applicable on hotel accommodation services depends on the room tariff per day which is summarized below-

Sr.no	Value of Supply per day per unit	Applicable GST rate
1.	Less than or equal to INR 7,500	12%
2.	More than INR 7,500	18%

 

Hotels are used for residential or lodging purpose but they are run as commercial businesses.

So, should they be considered residential or commercial property? Generally, CA, Advocates, Doctors are allowed to provide their services from the residential property and the land regulators do not allow to run the hotel etc. on residential property.

Further, even if hotels are viewed as commercial, can hotel accommodation services be differentiated from other renting services on the grounds of permanence of stay? Hotels are generally booked for temporary stay and hence the word ‘tariff’ is more commonly associated than ‘rent’ for charging accommodation services. Hence, in this light, will it be brought under the purview of the 54^th recommendation?

Therefore, the academic issue is that if a hotel is viewed as a ‘renting activity’ on ‘the commercial property’ and if the hotel is unregistered under GST, will not the GST have to be paid on a reverse charge mechanism (RCM) basis?

11. Issue No.8- In case of commercial shops located within precincts of a religious place being given out on rent by the trust owning it, who is an unregistered body, to a registered person, shall GST on such rent be applicable on RCM basis?
According to Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017, entry 13(b), renting out precincts of a religious place is exempt from GST if the following conditions are met:

• The place is intended for use by the general public.
• It is owned or managed by an entity registered as a charitable or religious trust under section 12AA or 12AB of the Income-tax Act, 1961 or a trust or an institution registered u/s 10(23C)(v) of the Income-tax Act or a body or an authority covered u/s 10(23BBA) of the said Income-tax Act
• The consideration charged for renting does not exceed the prescribed ceiling limits.
This exemption is based on the amount of consideration charged for such renting. If shops intended to be used for business/commerce purpose are rented out at a charge of ₹ 10,000 or more per month such exemption will not be available.
As the new amendment, for such shops located within the precincts of the said religious place wherein monthly rent is ₹ 10,000 or more and is given on rent by the trust which is an unregistered body, to a registered person GST on the same will be applicable on RCM basis.

Finally, it is puzzling!! Isn’t it?

Disclaimer:
It is stated that the Press Release contains the gist of certain matters for clarification. Of course, these matters will be crystallized with the publication of the circular. This article is authored based on the reading of the Press Release only. Authors and publishers shall not be responsible for the decisions taken based on this document.

Recently, the 54th GST Council meeting provides a clarity for real estate sector in respect of the taxability of preferential location charges (PLC) collected by the builders for residential, commercial, and industrial properties.

It is to be noted that this article is based on press release of said Council Meeting. CBIC has yet to come with Circular on this matter.

 

1. Issues:

Preferential location charges (PLC) are additional charges collected by developers for providing a preferred location within a project, such as a scenic view or proximity to amenities.

GST Department is sending notices for charging 18% GST on PLC by keeping it separate from the construction services and therefore the issue before the industry is:

 

Issue 1: Whether PLC is to be considered as an integral part of the overall supply of construction services and is subject to the same tax treatment as applied for construction services or PLC is to be taxed separately @18% GST?

 

Issue 2: Whether benefit of abatement of 1/3^rd of the amount charged in name of PLC shall be available or GST shall be applicable on the total amount charged on account of PLC?

 

Issue 3: Whether PLC shall be taxed on the booking of ready property (i.e. where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier)?

 

Issue 4: Can a refund be claimed by builder where the 18% tax has been charged on PLC by treating it as separate supply and paid to the government?

 

This article delves into the nuances of GST applicability on PLC in the light of recent press release by the GST Council.

 

2. Excerpts of 54^th GST Council Meeting:

As per the recommendations made during 54^th meeting of GST Council, it has been clarified as per below:

 

“location charges or Preferential Location Charges (PLC) paid along with the consideration for the construction services of residential/commercial/industrial complex before issuance of completion certificate forms part of composite supply where supply of construction services is the main service and PLC is naturally bundled with it and are eligible for same tax treatment as the main supply that is, construction service.”

 

On the perusal of the text written in the Press Release of the above recommendation, four pertinent issues arise as stated above.

 

3. Evaluation:

To appraise the above issues and implications thereof, let us firstly run through the subject matter, i.e. PLC from real estate perspective

 

What is PLC?

When a real estate developer sells immovable property, whether it is developed plots, residential units, or commercial spaces, various additional charges may be collected from buyers. One such charge is the Preferential Location Charge (PLC).

PLC is an extra cost that buyers pay to secure a unit with a superior location advantage. This could include factors like the direction the flat faces, the floor it’s on, the views it offers such as park-facing, lake-facing, sun-facing, east facing etc., and its proximity to other facilities. Essentially, PLC represents the premium collected for these added benefits.

4. Issue of taxability on PLC charges under GST: Composite supply or Separate supply?

 

4.1 Let’s put an illustration

Here’s an example to have the better understanding of GST implication on Preferential Location Charges-

 

Shri Madhav books an apartment in a construction project for a consideration of INR 10 Crores but with an additional benefit of sea-facing. For such added benefit, his consideration increases by an additional INR 2 Crore with total consideration coming up to INR 12 Crores.

 

It may be observed that the agreement between builder and the buyer refers to the sale of immovable property. The buyer agrees to pay in advance for certain other services that he will enjoy in addition to the construction service, and to pay a single consolidated amount for all these supplies.

 

4.2 Definition of Composite Supply:  As per Section 2(30) of the CGST Act: Unless the context otherwise requires

“composite supply means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;”

 

4.3 Analyzing the concept of composite supply with the help of Education Guide: While examining whether these services are naturally bundled and are supplied in conjunction with one another in the ordinary course of business and whether the construction supply is the dominant element and all other services in the bundle are ancillary or incidental to the supply of the construction service. It may be observed that the term ‘naturally bundled’ is not defined in the CGST Act / SGST Acts but reliance may be placed on Para 9.2.1 of the Education Guide that CBEC published in 2012, in this regard, which says that in contrast to other combinations, the services that are naturally bundled can be treated as provisioning of a single service that lends the bundle its essential character. Para 9.2.4 of the Education Guide ibid which says that whether the services so bundled are provided in conjunction with one another in the ordinary course of business would depend upon the normal or frequent practices adopted in a business and can be ascertained from indicators like whether a large number of service receivers reasonably expect such services to be provided as a package or whether a majority of the service providers in a particular area of business provide these services in a bundle.

 

4.4 Reading of Circular 177: Let’s look at the clarification given by CBIC for the treatment of PLC when it is collected along with lease premium for long term lease of land. CIRCULAR NO. 177/09/2022-TRU also provides that PLC is given the same treatment as lease premium for long term lease of land is treated under GST considering it to be the integral part of supply of long-term lease of plot and therefore, location charge is nothing but part of consideration charged for long term lease of plot.

 

Accordingly, it is clarified that location charges or preferential location charges (PLC) paid upfront in addition to the lease premium for long term lease of land constitute part of upfront amount charged for long term lease of land and are eligible for the same tax treatment, and thus eligible for exemption under Sl. No. 41 of notification no. 12/2017- Central Tax (Rate) dated 28-6-2017.

 

Authors do hold a view that even after the clarification given vide Circular 177 for treatment of PLC qua composite supply, there is not a need to provide the clarity on this issue.

 

4.5 Additional Reading of Notification 3/2019-CT(R): The GST rate is 1.5% (subject to 1/3^rd abatement in value) for properties that fall under the category of affordable residential apartment. It is defined as below:

 

Affordable residential apartment is a residential apartment in a project which commences on or after 01-04-2019, or in an ongoing project in respect of which the promoter has opted for new rate of 1.5% (effective from 01-04-2019) having carpet area – upto 60 square meter in metropolitan cities and upto 90 square meter in cities or towns other than metropolitan cities the gross amount charged for which, by the builder is not more than 45 lakhs rupees.

 

For the purpose of determining the threshold of the gross amount of Rs.45 lakh for affordable residential apartments, all the charges or amounts charged by the promoter from the buyer of the apartments shall form part of the gross amount charged and shall also include preferential location charges.

 

Of course, the definition has a different purpose from the value determination for GST levy purpose. The intent is clear that PLC forms part of the value of composite supply.

 

4.6 Conclusion: Therefore, in the present case, the PLC has to be bought as a package, where the construction service remains the predominant element, while accepting the fact that the buyer has the option not to pay for such service. It may be concluded that builder is providing a composite supply, where construction service is the principal supply.

 

5. Issue of availability of 1/3^rd abatement on PLC charges under GST:

5.1 Revenue’s approach: Department is contesting that in the Agreement for Sale, composite price comprising all elements of price is mentioned as consideration. However, where the price element of PLC is separately specified in the contract and so, there should not be the admissibility of abatement of 1/3^rd of the amount charged for floor rise and directional advantage as opposite to supply of construction service.

 

Department is having the argument that preferential location charges cannot be traced directly to the value of any goods or value of land but are as a result of the development of the complex as a whole and the position of a particular unit in context with that of the complex and therefore 1/3rd abatement should not be made available to PLC.

 

 

5.2 Reading of Section 8 and 9 of CGST Act: Section 8 provides the tax liability on composite supplies by considering the supply as a principal supply. It is reproduced as below:

“The tax liability on a composite or a mixed supply shall be determined in the following manner, namely: –

(a) A composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and

(b) A mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.”

 

Authors draw the attention on the provision of section 8 that once two more supplies are considered as composite supply then it shall be treated as a supply of such principal supply. It means it shall be treated as a supply.

 

Then an issue arises that whether there can be 2 values of a supply. Naturally there cannot be two values of a supply. To evaluate it, it is also important to refer the charging section 9(1) of CGST Act:

9(1) Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption ²[and un-denatured extra neutral alcohol or rectified spirit used for manufacture of alcoholic liquor, for human consumption], on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.

It may be noted that section 9 uses the word ‘value’ and not the word ‘values’.  Therefore, Authors carry a view where two or more supplies are considered as composite supply and where it shall be treated as a supply of such principal supply then there cannot be 2 values of such supply. Therefore the 1/3^rd abatement shall be available for PLC as well.

 

5.3 Reference of FAQs about availability of 1/3^rd abatement:  Authors  also draw the kind attention on FAQ (MEDIA & ENTERTAINMENT SECTORAL GROUP, HYDERABAD), DATED 28-6-2017 CGST in series of FAQ ON GST IN RESPECT OF CONSTRUCTION OF RESIDENTIAL COMPLEX BY BUILDERS/DEVELOPERS, also provides that PLC is a part of composite supply and hence would be attracting the same treatment as main supply of construction services and therefore GST on 2/3rd of the amount charged on account of PLC shall be taxable.

 

The FAQ is reproduced as below:

 

“Question- Whether “other charges” collected by the builders/developers towards “prime/preferential location”, “parking facility”, “fire fighting installation” etc. can be deducted from the total consideration for payment of GST?

Answer- Charges towards “preferential location/floor/facing”, “parking facility”, “firefighting installation”, “transformer”, “Gen-set facility” etc., collected by the builders/developers also attract GST as applicable to the principal supply (construction service) as they are naturally bundled and supplied in conjunction with the construction service.

Therefore, GST at the rate of 18% on 2/3^rd of the Value for such naturally bundled services is payable on the said charges also.”

 

5.4 Conclusion is amount charged PLC shall also be subject to 1/3^rd abatement being part of the composite supply.

As per this discussion, in the above illustration, the abatement shall be available on entire 12 crore rupee and thereby GST shall be applicable on 2/3^rd value i.e. 8 Crore.

 

GST treatment on PLC in case of Sale of Ready Property: Whether PLC shall be taxed on the booking of ready property (i.e. where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier)?

 

As per para 5(b) of Schedule II of the CGST Act, construction of a complex, building, civil structure, or a part of it, which is meant for sale wholly or in part shall be supply of service. However, if full consideration is received after the issuance of the certificate of completion, it is not considered a supply and is out of purview of GST.

 

In other words, GST is applicable only on booking of under-construction properties. Authors have a view that PLC shall be treated in the same manner as the consideration for apartment is treated under the GST law. Thereby, it can be concluded that no GST shall be applicable on PLC despite the booking of ready property.

 

So, tax shall be applicable in the illustration referred above, is on 8 Cr (i.e. 2/3^rd of 12 Cr).

 

6. Can a refund be claimed by builder where 18% GST has been charged on PLC by treating it as separate supply and paid to the government?

 

Article 265 of Constitution states that no tax shall be levied or collected except by authority of law. Therefore, in absence of any levy provision, the tax cannot be levied or collected.

 

In this backdrop, there are two options:

1. Builder can claim the refund u/s 54 subject to the unjust enrichment.
2. The builder can adjust the excess GST paid against the GST collected against their output GST liability as per section 39(9) of CGST Act read with Circular 26/26/2017.

 

Needless to state that builder has to ensure the proper compliances of statutory records of section 35 read with rule 56 of CGST Rules.

 

Disclaimer:

It is stated that the Press Release contains the gist of certain matters for clarification. Of course, these matters will be crystallized with the publication of the circular. This article is authored based on the reading of the Press Release only. Authors and publishers shall not be responsible for the decisions taken based on this document.