According to the Goods and Services Tax (GST) act of India, the Reverse Charge Mechanism (RCM) applies to the supply of services by an unregistered person to a registered person. This provision ensures that instead of the person providing the goods and services, the person receiving the services is responsible for paying the GST. This comprehensive guide aims to elucidate the nuances of RCM in a commercial rental agreement, its implications and rates that might apply in different arrangements.
RCM Under GST
RCM or Reverse Charge Mechanism is a clause under the Goods and Services (GST) system, where the liability to pay the tax goes from the service provider to the service recipient. This means that in case the tenant is registered as a business and using the space as a commercial address, and the landlord is not a business owner, the tenant has to pay GST to the government. On the other hand, GST is NOT required to be paid if the tenant is a registered business owner and the property is being exclusively for residential purposes and does not generate revenue in any way. RCM is levied only when the rental income surpasses Rs. 50,000 per month. Any amount below this threshold is exempt from this provision.
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RCM Under GST for Commercial Properties. Or Is It…
However in case of properties that are purpose built for commercial purposes, things get a little more complicated. In this situation, usually both the landlord and the tenant are registered businesses. So who pays the GST? The normal rate applicable rate is 18% as usual, and the liability to pay it rests upon the landlord. This obligation comes under the Forward Charge Mechanism or FCM, according to Entry No. 16 of Notification no. 11/2017 (Central Tax Rate) dated 28th June 2017. If you want to learn more about how GST is calculated on commercial property, read this article.
Forward Charge Mechanism
Forward Charge Mechanism in commercial real estate refers to the mechanism by which the responsibility for paying Goods and Services Tax (GST) is placed on the landlord or property owner. When a commercial property is rented out, GST is levied on the rental income. In the case of commercial property, GST is charged under the 'forward charge' mechanism. This means that the registered service provider, typically the landlord or property owner, is liable to pay the GST on the rental income. If the landlord is unregistered, there is no provision for reverse charge mechanism, and the GST is paid directly by the government on a forward charge basis. Remember that the Forward Charge Mechanism is applicable only to renting of properties that are used for commercial purposes. Even residential properties that are registered as commercial addresses and generate income fall under this umbrella.
Here is how it works:
- Landlord collects GST: The landlord adds the applicable GST rate (usually 18%) to the rent amount and charges the tenant the total sum.
- Landlord pays GST to government: The landlord is then responsible for filing GST returns and paying the collected tax to the government.
- Tenant does not pay GST directly: The tenant does not pay any GST directly to the government. The GST liability is already included in the rent they pay to the landlord.
Benefits of Forward Charge Mechanism:
- Simplified compliance for tenants: Tenants don't have to worry about filing GST returns or paying GST directly, which simplifies their tax compliance.
- Improved tax collection: The forward charge mechanism helps ensure efficient tax collection by the government.
- Transparency: The GST amount is clearly mentioned on the rent invoice, making the transaction more transparent.
Scenarios
Let's talk about scenarios where RCM of FCM can be charged under GST:
| If neither the landlord, nor the tenant are registered business owners | No GST charged under RCM or FCM. |
|---|---|
| If both the landlord and tenant are registered business owners | Landlord is liable to pay the GST as the registered service provider. |
| If the landlord is unregistered but the tenant is a registered business owner | Tenant is liable to pay GST under RCM if the property is Residential. |
Reverse Charge Mechanism (RCM) is not applicable to renting commercial property in India. This means the tenant is not responsible for paying GST on the rent under RCM. However, the landlord who is registered under GST is liable to pay GST on the rent at the standard rate of 18% under the forward charge mechanism. It's important to note that these are general guidelines, and there may be specific exceptions or situations where RCM might apply. If you have any doubts about the GST applicability in your specific case, it's best to consult with a tax advisor or our experts at PropReturns.
ITC Provisions When GST is Charged on Rent
In order to claim ITC or Input Tax Credit on commercial property rent, the tenant must be a registered GST taxpayer and use the rented property for business purposes only. To claim ITC, certain conditions must be met:
The tenant should have valid tax invoices or documents from the landlord.
The GST paid on the rent must be mentioned separately in the invoice.
The rent should be used for business purposes, allowing for the input tax to be creditable.
Restrictions on ITC: There are certain restrictions on claiming ITC on commercial property rent:
ITC cannot be claimed for rent paid for a property used for personal purposes or non-business activities.
If the tenant opts for the composition scheme or the property is exempt from GST, ITC cannot be claimed.
Proper Documentation is important to maintain proper records and documentation of rent invoices and related documents to support the claim of ITC.
Frequently Asked Questions (FAQs)
Q: When is RCM charged under GST for commercial properties?
A: If the rental income is derived from a commercial property, GST is charged on a forward charge mechanism, instead of RCM. If the landlord is not registered under GST, the tenant is liable to pay the tax on a forward charge basis.
Q: Is a residential property taken on rent subject to RCM?
A: If the tenant is a registered business owner, GST is applicable under RCM.
Q: How to file for GST return on commercial property rent?
A: To file GST return on commercial property rent, follow these steps:
First login to the website - https://services.gst.gov.in/services/login
Under the Services tab on the GST portal, click on the "Returns" tab, and select the "Return Filing" option.
For commercial property rent, you need to file GSTR-1 and GSTR-3B returns.
Q: Can ITC be claimed on repairs and renovation of property given on rent?
A: ITC or Input Tax Credit is applicable for repairs and renovations on a rental property. Under GST regulations, a registered landlord undertaking repair or renovation work can claim ITC on the associated GST expenses. For example, if a landlord who is registered under GST, incurs Rs. 10,000 as GST for renovating a property, they can fully claim this amount as ITC when filing GST returns.
