JULY 12, 2022

By Mr Abhishek Ranjan, Joint Partner and Ms Sadhvi Gupta, Senior Associate, Lakshmikumaran & Sridharan, Attorneys

THE scope of exemption on account of 'services by way of renting of residential dwelling for use of residence' has been debatable since quite some time now. The exemption got carried forward from the erstwhile service tax regime to the GST regime, but plagued with its own set of issues/problems. The application of this exemption where recipient is business entities has always been under the lens of authorities.

Recently, in the 47th GST Council meeting that concluded on 29th June 2022, it was proposed to withdraw the exemption on renting of residential dwelling to business entities (registered persons).

Even before this proposed change, the interpretation of the term 'residential dwelling' has been the main discussion point for this exemption. The Education Guide issued by CBEC in 2012 clarified that the said term has to be interpreted in terms of the normal trade parlance as per which it is any residential accommodation, but does not include hotel, motel, inn, guest house, camp–site, lodge, house boat, or like places meant for temporary stay. Despite such clarification, application of the same in context of hostels was still not clear.

A ruling given by Karnataka Advance Ruling Authority in case of M/s. Sri. Taghar Vasudeva Ambrish - 2020-TIOL-84-AAR-GST echoed a similar reasoning as given in the Education Guide. In the said case, the applicant was the co-owner having 42 rooms in a residential property with terrace and common areas. This property was leased as hostel for providing long term accommodation to students and working professionals with the duration of stay ranging from 3 months to 12 months. The authority disallowed the benefit of exemption stating that the said property was like a hotel and by no imagination can be termed as a residential dwelling. Even if the same is given for residential purposes, the services provided is not for useas residence by the lessee. Services by a hotel, inn, guest house, club site or campsite, by whatever name called, or other commercial places for residential or lodging purposes are covered by different entries in the schedule of the exemption notification or under different notifications and this shows that rooms though given on rent for residential purposes would not amount to residential dwelling.

Upon appeal to AAAR Karnataka - 2020-TIOL-46-AAAR-GST, the decision of AAR was upheld that the term 'residential dwelling' cannot include a hostel, which is a sociable accommodation and not a residential accommodation. Further, the leased property is not used by the lessee for use of residence but only for operating his business of subletting for providing hostel/paying guest accommodation to students.

Similarly, in the advance ruling pronounced in case of M/s. Ghodawat Enduserve LLP - 2021-TIOL-216-AAR-GST, the Maharashtra advance ruling authority also denied the benefit of exemption to the applicant who ran an educational institution and provided an optional hostel facility to its students.It was held that hostel is not a residential dwelling as the same is exclusively meant for temporary stay during the time period of training and coaching only. In addition to the period of stay, the ruling observed that there was no kitchen facility available in allotted room. Further, there is no permission for parents/guests of the students allowed to stay along. Considering such a scenario, the ruling held that the criteria for residential dwelling under common parlance test was not met. It may be noted that in the instant case the rent was below Rs. 1000/- per day per person, hence GST exemption under a different entry was allowed.

The above rulings provided a consistent view that hostels cannot be considered as a 'residential dwelling' and, hence, leasing out of such hostel spaces continued to be taxed at 18%.

However, a ray of hope was seen with a recent decision of High Court of Karnataka - 2022-TIOL-242-HC-KAR-GST [appeal against the order of Karnataka AAAR (supra)] ruled in favour of the assessee in this context. The Division bench, after considering all the facts and the rulings of both AAR and AAAR Karnataka, held that-

- The term 'Residential Dwelling' has to be understood in normal trade parlance as clarified by the Education Guide of CBEC (now CBIC). Deriving an understanding from the same, the activity of leasing out hostel to students and women will be considered as 'Residential Dwelling' even if the lessee itself is not using the premises.

- It relied on the reasoning that residence means a person eats, drinks and sleeps in that place and it is not necessary he should own it.

Therefore, the benefit of exemption was made available to the petitioner and ruling passed by AAAR Karnataka was quashed.

The above decision did not discuss the importance of kitchen facility or option of family members/guests to stay over at the leased premises. Whether or not such leased rooms that lack proper infrastructure for residence purposes can be understood as self-contained residential unit is still an open issue.

In presence of a favourable decision, various tax assessees that had been conservatively paying tax on such supply of leasing of hostel spaces modified their practice and started availing the exemption. There may have been cases where assesses must have knocked the doors of the authorities with applications of refund of taxes already paid to the government in this regard.Also, assesses that had received a negative advance ruling from the respective state authorities, may have preferred an appeal.

Though the scope of the exemption entry has been defined for the prospective period, the fate of such issues relating to the intervening period till the effective date of the curtailed exemption still remains undecided. The actual meaning and scope of residential dwelling is still not free from ambiguity. Now that the renting of residential property becomes taxable, companies need to examine the credit eligibility specifically in the light of restriction under Section 17(5)(g)of the CGST Act for personal consumption. A comprehensive clarification from the government elaborating on the said issues would avoid unnecessary litigation.

[The views expressed are strictly personal.]