Constitutional Validity of GST on Lease/Rental Payments

Value Added Tax (VAT) was an intra-state multi-point tax system which was administered by the State Governments in India. All states have replaced their other sales tax regimes with VAT since April 2005. However, interstate sales still fall under Central Sales Tax (CST), which is basically charged by the Government of India and levied by the different state governments.

Introduced in 1994, service tax was a type of tax charged by the Government of India on availing of any service mentioned under or approved to be provided except services that fall in the negative list and by considering the Place of Provision of Service Rules, 2012 and collected as per Point of Taxation Rules, 2011 from the individuals liable to pay service tax.

What is the Goods and Services Tax (GST)?

The Goods and Services Tax (GST) came into effect from 1 July 2017 in India and the existing laws were repealed. It was inarguably a major reform in relation to indirect taxes in the country. The goal of GST was to replace the numerous taxes levied on different goods and services by a single tax known as GST.

GST is a multi-stage VAT that is imposed on purchase of goods, availing of services or both. It aims to merge the various taxes into a single tax. Several transitional efforts were put in place to allow for a seamless and hassle-free transition to the GST structure. In addition, no Input Tax Credit (ITC) or other benefits earned under the previous regimes were added to the new structure.

However, there are some goods that are still covered by the VAT structure; some of which are:

Goods	Governing Tax Regime
5 Petroleum Products (Petrol, Diesel, Natural Gas, Aviation Fuel, Crude Oil)	VAT/CST (along with Central Excise Duty)
Alcoholic Liquor for human consumption	VAT/CST (along with State Excise Duty)

The above-mentioned products do not fall under the scope of the GST regime and are still charged under the VAT/CST structure. Although recommendations have been made to add them to the GST regime, no such legislation has been released that aims to do the same.
Applicability of GST on Lease/Rent Payments

Under GST, all supplies of goods and services are taxable unless specifically exempted. While the GST law does not explicitly mention lease and rent transactions, it provides clarity on the taxability of specific cases.

Lease/Rent on Residential Property

As per GST laws, the lease or rent of residential properties for residential purposes is generally exempt from GST. This means that if an individual rents out a residential property for residential use, GST does not apply to the transaction, and the landlord is not required to collect and remit GST to the government. However, following are two instances where the landlord or tenant may have to pay the GST:

• When the residential property is rented out for residential purposes and the tenant is registered under GST, GST shall be applicable at 18% and payable by the tenant.
• When the residential property is not rented out for residential purposes, GST shall be applicable at 18% and payable by the landlord if they are registered under GST.

As such, it can be said that when a residential property is leased/rented out for residential purposes, it shall be exempted from GST. Any other kind of lease/renting of an immovable property would attract GST at 18%, as it would be deemed as a ‘supply of service.’

Lease/Rent of Commercial Property

Leasing or renting out any commercial property shall attract GST. If anyone chooses to rent out their commercial property to someone else for commercial usage, GST would be applicable to the transaction. Irrespective of whether the tenant is registered under GST or not, the act of renting out such a property is enough to attract GST. The landlord must charge GST at 18% on the rent amount and remit it to the government.

Constitutional Provisions

The fact whether GST on lease/rent payment is constitutionally valid or not remains a topic that requires judicial review. The key point of contention lies in the classification of lease/rent transactions for GST purposes. GST law categorizes transactions into goods, services and composite supplies.

As per the provisions of Article 246A of the Constitution of India, GST can only be levied on ‘goods and services.’ When a property is leased/rented out, the landlord does not provide any ‘service to the tenant and, thus, GST shall not be applicable on the same. Only State Governments have the authority to levy tax on transactions related to immovable property under Entry 49 List II of the Seventh Schedule of the Constitution of India. As such, lease/rent transactions are not chargeable with GST under Article 246A of the Constitution of India.

Relevant Judgements

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 to the Central Goods and Services Tax (CGST) Act, 2017 and the Goa Goods and Services Tax Act, 2017.

The petitioner stated that as per Article 246A of the Constitution of India, only ‘goods and services’ are chargeable with GST. In the case of a lease/rent agreement, the landlord/lessor does not provide any ‘service’ to the tenant/lessee. Therefore, the same cannot be charged with GST. Only State Governments have the authority to levy tax on transactions related to immovable property under Entry 49 List II of the Seventh Schedule of the Constitution of India. As such, lease/rent transactions are not chargeable with GST under Article 246A of the Constitution of India.

The petitioner stated that when a property is leased/rented out by a landlord to a tenant, the landlord gives up all their rights and enjoyment over that specific property to the tenant through the lease/rent agreement for the period specified in the said agreement.

As per the Bombay High Court’s decision, the Parliament possesses broad powers under the residuary power of legislation. The Court acknowledged that the Parliament assumed that there is a service element in the lease of land. As such, considering the Service Tax was enacted under the residuary power of the government, challenging the assumption of the Parliament was not permissible as long as the tax does not fall under List II of the Seventh Schedule.

The petitioner chose to, however, challenge the order passed by the Bombay High Court along with the constitutional validity of GST on lease/rent payments. A Special Leave Petition (SLP) was filed by the petitioner before the Supreme Court of India, which granted leave to Petitioner’s appeal and chose to admit the appeal as well. The Appeal was instructed to be listed before the Constitution Bench of 9 of the Supreme Court of India and to be connected with Civil Appeal No. 4487 of 2010.

The decision of this 9-judge Constitution Bench would be a landmark judgment and bring the much-required clarity in relation to the constitutional validity of levying GST on lease/rent payments.

Conclusion

The constitutional validity of GST on lease/rent payments still remains unclear and quite a complex aspect to address. Although judgments have at times favored imposing GST on such transactions, there is no clarity about their specific categorization. Considering their imposition requires much more clarification, it is imperative for the legislature to bring more clarity about their categorization.