GST applicable on sublet accommodation, rules Karnataka AAR

The Authority on Advance Rulings (AAR), Karnataka has ruled that GST is applicable on residential accommodation sublet by a tenant, a ruling that experts said could open a Pandora’s box of litigations.

In a case involving about 42 single rooms having been sublet by a tenant to students for periods ranging between three months to 11 months, AAR noted that the property given out for sub-renting matched that of a hotel – rooms with attached bathrooms – “which can by no imagination be termed as residential dwelling”, or a house.

While renting of accommodation is exempted from the goods and services tax (GST), the authority has ruled, “The exemption prescribed cannot be sought and the lessors have to charge GST while issuing invoice for the lease services.”


It said, “The applicant is not providing the service of leasing in individual capacity to the company but as a part of the group of lessors… It is seen from the agreement that lessors are providing the service of leasing or renting of immovable property for a consideration.”

The AAR order dated March 23 is likely to trigger a number of litigations, experts said.

“With this ruling, lessors may not have the comfort of presuming GST to be exempt, where end use of the property is residential,” said Harpreet Singh, partner at KPMG India. “One would need to ascertain whether the leased property qualifies as a ‘residential dwelling’ to claim the exemption benefit.”

On the basis of the ruling, tax authorities could well begin demanding 18% GST applicable on renting out commercial property from landowners leasing residential hostel-style accommodations to schools, colleges, educational institutions, offices, corporates, or any other establishment, experts said.

“Though ruling has some basic logic to it, still it is expected to open a Pandora’s box of litigation for numerous individuals earning passive income,” said Rajat Mohan, senior partner at AMRG Associates.

Some experts said the ruling could be appealed against since in several cases authorities of different states have ruled in favour of exemption from taxation.

“One would expect this ruling to be challenged and hopefully reversed,” said Pratik Jain, partner at PwC India.

Since the ruling doesn't have any stipulation that the property should be directly rented out to individuals, the exemption from paying GST should be available as long as the end use of residential nature is established, he said.