06.05.2022: GST on Renting business – A Case Study

GST on Renting business – A Case Study

The aim of this case study is make understand the practical aspect of the renting business operationalize in the market & their complexities under various arrangements with respect to provisions of GST Act, 2017. 

Let us understand the same with a detailed Case Study.

Case Study

Rosewood Hotel Ltd. is registered place of business in Raipur engaged in varied of activities. One of such engagement is providing renting of immovable property located in Raipur. The company provides the commercial unit to the business houses (“tenant”). The agreement between the tenants states that the payment for the service to be made within 15 days of the date of invoice. In case the payment has not been made in the stipulated date, then the interest would be levied @21% p.m. from the date of delay. The other related details are:-

S. No. Particulars Amount
1. Rent of the building Rs. 1000sqft. Pm.
2. No. of tenants in First Qtr. 15 pm.
3. No. of tenants in July & Aug 32 pm.
4. No. of tenants in remaining period 20 pm.
5. Each tenant can occupy the space  560 sq ft.
6. Rate of interest on delayed payment by tenant 21% pm.
7. Refundable deposit by each tenant Rs. 1,00,000/-

The company provide the following additional service along with renting of immovable property:-

  1. Company procures meter rent which support in supplying electricity to the space occupied from each tenant @Rs. 1500 per month.
  2. The company procures electricity from Chhattisgarh POWER CORPORATION LTD (CPCL) @ Rs. 6 per unit. The electricity is utilized by the tenants in the space occupied. In year 2018, company got the bill of 1,20,000 units from HPPCL.
  3. Only 10 tenants in each month makes the initial payment on time. Remaining makes the payment in lag of 2 months from the date of invoice along with interest.
  4. Company pays the tax liability to government treasury by the last date of the succeeding month whereas the due date of GSTR-3B is 20th of the succeeding month. Rate of interest on delayed payment is 18%.
  5. The company also receives transfer fees on account of transferring of the lease document from one tenant to another. The company receives Rs. 93,000/-in July &Rs. 50,000/- in September.
  6. The company raises the bill of supply & tax invoice on 1stday of each month.
  7. Company made following expenditure on the eve of the Diwali i.e. November:-
  8. Rate of tax @18%.
Particulars Expense amt. (Rs.) IGST CGST SGST
Electric fitting 2,00,000 18,000 9,000 9,000
Renovation of 1680 Sqft. (addition to fixed assets) 2,51,200 9,216 13,500 13,500
Painting 1,00,000 9000 9000
Glass work 35,000 3,150 3,150
Water charges 24,000
Housekeeping exp. 50,000 pm 4,500 pm. 4,500 pm.

QUESTIONS:-

  1. How much revenue has been generated by company in the month of July?
  2. Would the electricity reimbursed by the company from the tenant is taxable?
    1. If the reimbursement is at par
    2. If reimbursement is at Rs. 8 per unit
  3. What is tax liability for the month of July GSTR-3B?
  4. Total interest liability paid by company in the month of July?
  5. Would the deposit received by the company is the part of revenue & liable to tax? Please specify the reason.
  6. What would be the treatment under GST law, if the electricity bill is paid by tenants himself?
  7. If no interest from the tenant has been received, then would the company is still required to pay the tax on it? Justify your answer.
  8. Net cash liability paid for the month of November?
  9. In case, company leased the last floor of the building for residential purpose to an educational institution for the rent of Rs. 55,000/-pm. Would this affects the taxable turnover calculated in Question 1?

SOULTIONS:-

Answer to question 1.

As per sec. 2(6) of CGST Act, 2017, “aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.

As per sec. 2(112) of CGST Act, 2017, “turnover in State” or “turnover in Union territory” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess.

Particulars Calculation Amount (Rs.)
Rent from 32 tenant, bill raise on 1st July Rs. 1000*560*32 1,79,20,000/-
Sale of electricity Rs. 6*120000/12 60,000-
Meter rent Rs. 1500*32 48,000/-
Transfer fees 93,000/-
Interest accrued on delayed payment of rent Rs. 1000*560*22*21%*0.5 12,93,600/-
Revenue for July   1,94,14,600/-

Answer to question 2.

Sec. 15 of CGST Act, 2017 specifies the value of taxable supply as-

“(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

(2) The value of supply shall include––

(a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;

(b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;

(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;

(d) interest or late fee or penalty for delayed payment of any consideration for any supply; and

(e) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

Explanation.––For the purposes of this sub-section, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.

(3) The value of the supply shall not include any discount which is given––

(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) after the supply has been effected, if—

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

(4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.

(5) Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.”

Supply of Electricity is declared as exempted supply under HSN 2716 under notification no. 02/2017-CTR and notification no. 12/2017-CTR as the transmission or distribution utility. Therefore CPCL would not charge the GST on the value of the supply of the electricity to the company & becomes his exempt supply.

In the instant case, company reimburse the electricity bill from the tenants at par i.e. Rs. 6 per unit & Rs. 8 per unit. Such reimbursement would be made based on the unit recorded from sub-meter installed at the outside of the space allotted. Two view can be taken as:-

  1. Company first purchase the electricity from the distribution utility & thereafter sold to the tenants in the form of reimbursement. The value of sale of electricity as specified u/s 15 of CGST Act, 2017 is the transaction value of supply. Under Notification no. 02/2017-CTR, the electric energy is treated as exempted goods, therefore sale of electricity would not liable to levy tax.
  2. Another view can be taken, as it is the reimbursement of electricity expense whether at par or at other incremental rate but allied to the principal supply of renting of immovable property, which is a taxable supply. The renting of immovable property cannot be made without the supply of electricity. U/s 15 of CGST Act, 2017 the transaction value includes incidental expense charged by the supplier to the recipient or amount charged for anything done by the supplier on or before the supply. Therefore the reimbursement of the electricity expense is also become taxable supply & liable to tax similar to the supply of renting of property.

Answer to question 3.

The total tax liability for the month of July is:-

Particulars Calculation Amount (Rs.)
Rent from 32 tenant, bill raise on 1st July Rs. 1000*560*32 1,79,20,000/-
Sale of electricity exempt supply
Meter rent Rs. 1500*32 48,000/-
Transfer fees 93,000/-
Interest received on delayed payment of June rent Rs. 1000*560*5*21%*1.5 8,82,000/-
Taxable value   1,89,43,000/-
Tax rate 18%
Central Tax Liability for July GSTR-3B   17,04,870/-
State Tax Liability for July GSTR-3B   17,04,870/-

Answer to question 4.

Sec. 50 of CGST Act, 2017 states as-

(1) Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council:

Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger.

(2) The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.

(3) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent., as may be notified by the Government on the recommendations of the Council.”

The company delayed in filing July GSTR-3B by 11 days i.e. 31st Aug but the due date is 20th Aug. As ITC of Rs. 4,500 (CGST & SGST each) available, therefore the net tax liability is to be paid in cash is Rs. 17,00,370/-. Interest liability would be Rs. 17,00,370*11/365*18% = Rs. 9,224 each under CGST & SGST.

Answer to question 5.

As per Sec. 2(31), “consideration” in relation to the supply of goods or services or both includes–

“(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.”

No, the refundable deposit received by the company is not the part of revenue. As per proviso to sec. 2(31)(b) of CGST Act, 2017, a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

In the instant case, deposit is refundable at the end of the agreement & also not treated as the value of supply. It is only being received on account of security which is being recorded as current liabilities. Hence it is not the part of revenue in accounting terms & turnover under GST law.

Answer to question 6.

In case the electricity bill is paid directly by the tenant, which means that the bill is in the name of the tenant. The supplier of the electricity i.e. CPCL had not charged the GST on the value of the supply on availing the exemption under Notification no. 12/2017-CTR i.e. transmission & distribution of electricity by the transmission & distribution utility. 

Answer to question 7.

The company has a provision in an agreement for the receipt of interest @21% pm on the delayed payment of rent. The company raises the tax invoice for the said interest amount by levying GST.

The principal supply i.e. renting of immovable property is categorised as supply of service under paragraph 5(a) of Schedule II. Referring to sec. 13(6) of CGST Act, 2017 which states as-

“(6) The time of supply to the extent it relates to an addition in the value of supply by way of interest, late fee or penalty for delayed payment of any consideration shall be the date on which the supplier receives such addition in value.”

In other words, the liability to pay tax on interest on delayed payment of value of supply would only be paid once it is received by the supplier.

Therefore, if no interest is paid by the tenant, then no tax is required to pay to the government.

Answer to question 8.

Sec. 49 of CGST Act, 2017 specifies about the manner of payment of tax, interest, penalty & other amount as-

“(1) Every deposit made towards tax, interest, penalty, fee or any other amount by a person by internet banking or by using credit or debit cards or National Electronic Fund Transfer or Real Time Gross Settlement or by such other mode and subject to such conditions and restrictions as may be prescribed, shall be credited to the electronic cash ledger of such person to be maintained in such manner as may be prescribed.

(2) The input tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger, in accordance with section 41, to be maintained in such manner as may be prescribed.

(3) The amount available in the electronic cash ledger may be used for making any payment towards tax, interest, penalty, fees or any other amount payable under the provisions of this Act or the rules made thereunder in such manner and subject to such conditions and within such time as may be prescribed.

(4) The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and within such time as may be prescribed.

(5) The amount of input tax credit available in the electronic credit ledger of the registered person on account of––

(a) integrated tax shall first be utilised towards payment of integrated tax and the amount remaining, if any, may be utilised towards the payment of central tax and State tax, or as the case may be, Union territory tax, in that order;

(b) the central tax shall first be utilised towards payment of central tax and the amount remaining, if any, may be utilised towards the payment of integrated tax;

(c) the State tax shall first be utilised towards payment of State tax and the amount remaining, if any, may be utilised towards payment of integrated tax.

Provided that the input tax credit on account of State tax shall be utilised towards payment of integrated tax only where the balance of the input tax credit on account of central tax is not available for payment of integrated tax;

(d) the Union territory tax shall first be utilised towards payment of Union territory tax and the amount remaining, if any, may be utilised towards payment of integrated tax:

Provided that the input tax credit on account of Union territory tax shall be utilised towards payment of integrated tax only where the balance of the input tax credit on account of central tax is not available for payment of integrated tax;

(e) the central tax shall not be utilised towards payment of State tax or Union territory tax; and

(f) the State tax or Union territory tax shall not be utilised towards payment of central tax.

(6) The balance in the electronic cash ledger or electronic credit ledger after payment of tax, interest, penalty, fee or any other amount payable under this Act or the rules made thereunder may be refunded in accordance with the provisions of section 54.

(7) All liabilities of a taxable person under this Act shall be recorded and maintained in an electronic liability register in such manner as may be prescribed.

(8)…….

(9)…….

(10)…….

(11)…………………”

The total tax liability is:-

Particulars Calculation Amount (Rs.)
Rent from 32 tenant, bill raise on 1st Nov Rs. 1000*560*20 1,12,00,000/-
Sale of electricity Rs. 6*1,20,000/12 60,000-
Meter rent Rs. 1500*20 30000/-
Interest received on delayed payment of Oct rent Rs. 1000*560*10*21%*1.5 17,64,000/-
Total value of supply in November 1,30,54,000/-
Less:- exempted supply -60,000/-
Taxable value   1,29,94,000/-
Tax rate 18%
Central Tax Liability for Nov GSTR-3B   11,69,460/-
State Tax Liability for Nov GSTR-3B   11,69,460/-

The net eligible ITC available for utilization is:-

Particulars Eligibility IGST CGST SGST
Electric fitting Eligible 18,000 9,000 9,000
Renovation of 1680 Sqft. (addition to fixed assets) Blocked Credit u/s 17(5) 9,216 13,500 13,500
Painting Eligible 9000 9000
Glass work Eligible 3,150 3,150
Housekeeping exp. Eligible 4,500 4,500
Gross ITC 27,216 39,150 39,150
Reversal ratio u/s 17(2) read with Rule 42 of CGST Act, 2017 is 0.46%i.e. (60,000/1,30,54,000/-)
ITC to be reversed 125 180 180
Net ITC available for utilization   27,091 38,970 38,970

The net cash to pay is be derived after utilizing ITC in the manner as specified u/s 49(5) i.e. IGST, CGST & SGST ITC would first utilize with their respective tax head & thereafter cross utilization of ITC would be made, if remaining. Provided CGST & SGST ITC would not be utilized for the payment of SGST & CGST liability respectively.

Particulars CGST SGST
Total tax liability 11,69,460/- 11,69,460/-
Less:- utilization of CGST & SGST ITC -38,970/- -38,970/-
Less:- utilization of IGST ITC -27,091/-
Net liability to be paid in cash 11,03,399/- 11,30,490/-
Interest liability for 11 days 5,986/- 6,133/-
Total liability paid in cash 11,09,385/- 11,36,623/-

Answer to question 9.

Yes, the taxable turnover calculated in question 1 got increased by Rs. 55,000/-. The supply of renting of commercial immovable property for residential use for consideration is not exempt. The facts given is violating the conditions specified under entry no. 12 of notification no.12/2017-CTR i.e. renting of residential dwelling and residence use. Hence the rent of Rs. 55,000/- is being taxed @12%.

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