Renting commercial or residential property for business purposes in India is very common. However, now that we have GST RCM on Rent, the obligations with respect to tax liability are somewhat changed for some rental transactions. Reverse Charge Mechanism (RCM) is when the tax liability for GST transfers from the supplier (landlord) to the recipient (tenant) in certain cases. It may sound rather simple but implications will arise for tenants, landlords and businesses, particularly in regard to RCM on commercial rent under GST. This article aims to enlighten the reader on how GST RCM on Rent is processed, who is liable, compliance, and how it will impact daily business.
Understanding GST RCM on Rent
Under GST, the Reverse Charge Mechanism (RCM) means that the recipients of the goods or services pay the GST but they pay it directly to the government instead of to the supplier. For our purposes, relate to RCM and rent only in certain contexts. We will be most concerned with commercial property rent or residential properties rented for business purposes.
Example:
If a registered business rents commercial property from an unregistered landlord, they would be required to pay GST under RCM, subject to there not being a contrived return to the landlord using the rent that had GST charged to it. Tenant may also be entitled to claim Input Tax Credit (ITC), if suitably entitled to do so.
Legal Provisions for GST on Rent under RCM
The provisions for GST on rent are covered by the following:
• Section 9(3) & 9(4) of the CGST Act, 2017
• Notifications issued by the Govt of India e.g. Notification No. 13/2017 - Central Tax (Rate) and its amendments.
Key Rules:
• Rental of Commercial Properties: Registered person may be liable under RCM for rental of a commercial property from any person (registered or unregistered) that has GST applied.
• Rental of Residential Properties for Business: On or after July 18, 2022, GST applied under RCM, if a registered person rents a residential property to carry on business.
How GST RCM on Rent Affects Tenants
1.Increased Compliance Responsibility
Tenants are required to also register under GST (if they have not already) and file GST returns to account for the tax collected under RCM.
2. Cash Flow Effect
The leased tenant must pay GST out of pocket to the government and later submit a claim for ITC. This creates a temporary cash outflow.
3. ITC Entitlement
The tenant can claim ITC on the GST paid under RCM to the extent that the leased space is used for taxable business activities, therefore is able to mitigate the cost impact.
4. Accounting Treatment
Businesses need to ensure correct accounting entries and accounting for GST paid under RCM to make sure they do not make a mistake in claiming credits.
How GST RCM on Rent Affects Landlords
1.Relief from Tax Collection & Payment
As the tenant is required to collect GST and remit to the government by way of RCM, the landlord has been relieved from this compliance burden.
2. No GST Registration Required (in certain circumstances)
If the only business activity of the landlord is to lease efforts of the property under RCM conditions, a landlord may not be required to register under GST (assuming they have no other taxable supplies).
3. Effect on Rent Negotiations
As the tenant is required to pay GST, landlords may need to have clarification on this in their respective agreement so it is clear to avoid future disputes.
How GST RCM on Rent Affects Businesses
1.Additional administrative burdens
Organizations that rent a building to use as a commercial or residential premise will have to deal with added compliance as they are taking on extra responsibility for RCM.
2. Cost vs. benefit of credit
While GST incurred under RCM can be claimed as an ITC, organizations have the added burden of being able to deal with cash flow to make the cash payment to ensure they are in compliance and submit their tax liabilities on time.
3. Penalties
If you fail to notice the RCM rules and charges, there are various interests, fees, and penalties.
When RCM on Commercial Rent under GST is Applicable
Here’s a quick reference table:
Scenario
RCM Applicability
Tax Payer
Commercial property rented to registered business by unregistered landlord
Yes
Tenant (under RCM)
Commercial property rented to registered business by registered landlord
No RCM (forward charge applies)
Landlord
Residential property rented for personal use
No GST
N/A
When Does RCM Apply to Rent Under GST?
Whether RCM on commercial rent under GST largely depends on the type of tenancy, the tenant's status, and the purpose of the rental. The primary scenarios can be outlined as follows:
1.Renting of Residential Property for Commercial Purposes
2. Renting of Commercial Property
3. Rent Paid to Unregistered Landlords
GST Rate on Rent under RCM
In the majority of cases where rental under GST is under RCM, the applicable GST rate is 18% (9% CGST + 9% SGST).
Example
If the rental amount (monthly) is ₹50,000 for a commercial office:
• GST @ 18% = ₹9,000
• Tenant pays ₹9,000 to the government under RCM
• Tenant is able to claim ₹9,000 as ITC in the GST return (if permitted).
How GST RCM on Rent Works – Step-by-Step
1.Determine Applicability – Ensure that you determine if the rental transaction falls under conditions of RCM.
2. Calculate GST – Determine the amount of GST based upon the applicable GST rate (18%) of the rent amount.
3. Pay GST via RCM – Utilize the GST Portal to pay the taxes directly via RCM.
4. Claim ITC – Submit your GST Return to claim Input Tax Credit (if permitted).
5. Maintain Detailed Records – Maintain Back-up across invoices, agreements, and GST challans to be readily available in case of audit.
Compliance Requirements
If you are tenant liable to RCM GST under rent:
• Report the transaction in your GSTR-3B under the RCM section.
• Self-invoice the transaction where notice is given that the landlord is not GST registered.
• Pay your GST RCM transaction before the due date to avoid penalties.
• If eligible, claim ITC in GSTR-2B/3B.
Common Misconceptions About GST RCM on Rent
• Myth 1: "Residential property rents are always exempt from GST."
Fact: Only residential property rented for personal use is exempt. Larger amounts of residential property rented for commercial purposes will fall under RCM in the larger transaction.
• Myth 2: "Only commercial property is subject to RCM."
Fact: Residential property rented for the purposes of business has and continues to be subject to RCM effective July 2022.
• Myth 3: "Landlords must always collect GST from the tenant on rent."
Fact: Landlords do not collect GST from the tenant; it is the tenant who must pay GST directly to the government in RCM transactions.
Penalties for Non-Compliance
Failing to pay GST on residential rent via RCM can result in:
• Interest @ 18% per annum on tax owing.
• Penalty of 10% of the tax or ₹10,000 whichever is higher.
• Denial of ITC on any future audits.
Conclusion
The GST RCM on Rent has changed how rental transactions are taxed in India. For tenants, it means additional compliance while providing the benefit of ITC. For landlords, in some cases, it will allow relief as they will not be directly responsible for GST collection. For businesses, it is about aligning rental agreements (as necessary) and ensuring accounting systems can satisfy GST requirements. Before we conclude this session, it is essential to have an understanding of GST on Rent under RCM as well as RCM on commercial rent under GST so that you do not incur penalties and keep your tax compliance simple. With effective policies and procedures, this can be part of business processes, not destroying your bottom line.
FAQs on GST RCM on Rent
Q1. What is GST RCM on Rent? It is the system where the tenant, instead of the landlord, pays GST directly to the government for certain rental transactions.
Q2. Does RCM apply to residential property? Yes, if the residential property is rented for business purposes to a registered person.
Q3. What is the GST rate for RCM on rent? Generally, 18% (9% CGST + 9% SGST).
Q4. Can tenants claim Input Tax Credit on GST paid under RCM? Yes, provided the rent is for business purposes and the tenant is eligible for ITC.
Q5. Does RCM apply if the landlord is registered? RCM applies mainly when renting from an unregistered landlord or when renting residential property for business purposes. If a registered landlord charges GST under forward charge, RCM does not apply.
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