2020 (9) TMI 784 - AAR - GST

Renting of immovable property service - Deduction of property taxes and other statutory levies - Valuation of rental income - inclusion of notional interest on the security deposit - exemption of tax under the general exemption of ₹ 20 lakhs - whether the property tax other statutory levies paid/ payable by the applicant be deducted from the rental income for the purpose of arriving at the value of rental income? - HELD THAT - It could easily be inferred from Section 15(2) that any taxes, duties, cesses, fees and charges, levied under any law for the time being in force, shall include in the value of taxable supply. In the instant case the property tax is levied, under the Karnataka Municipalities Act 1964, by the BBMP in Bangalore. Further the only exclusions from the value of the taxable supply are the taxes, duties, cesses, fees and charges levied under the CGST Act 2017, SGST (KGST) Act 2017, UTGST Act 2017 GST (Compensation to States) Act, subject to the condition that they are charged separately by the supplier - It is observed that in the instant case, the supplier (applicant) and the recipient are not related; price is the sole consideration of the supply and monthly rent is the price payable. Thus the monthly rent is the transaction value and the same would be the value of supply of the impugned service of RIS - the property tax is not deductable from the value of taxable supply of Renting of Immovable Property service. Whether notional interest on the security deposit should be taken into consideration for the purposes of arriving at total income from rental? - HELD THAT - The security deposit is collected normally equivalent to 6 months or 12 months rent. Also it is a known fact that the higher the security deposit lower the monthly rent amount. In the instant case, an amount of ₹ 5 Crore is proposed to be collected as security deposit and a monthly rent of ₹ 1.5 Lacs. However the applicant has not furnished adequate date / information so as to decide whether actually the notional interest influences the monthly rental amount or not - the notional interest has to be considered as part of value of supply of service, if and only if the said notional interest influences the value of supply i.e. value of RIS service / monthly rent and is leviable to GST along with monthly rent at the rate applicable to monthly rent. Whether the applicant is entitled for exemption of tax under the general exemption of ₹ 20 lakhs? - HELD THAT - The interest free security deposit does not come under the purview of supply as per Section 7 of CGST Act, 2017 since it is not a consideration. However, the notional interest on security deposit becomes part of consideration along with monthly rent, if it influences the value of the supply - in view of the submission made by the applicant that they have no other business besides what they have submitted to this Authority, it is found that they are entitled for the general exemption for registration purpose, subject to the condition that their annual total turnover which includes monthly rent and notional interest, if it influences the value of supply, does not exceed the threshold limit.

Issues Involved:
1. Deduction of property taxes and statutory levies from rental income.
2. Consideration of notional interest on security deposit for rental income.
3. Entitlement to tax exemption under the general exemption of ?20 lakhs.

Detailed Analysis:

Issue 1: Deduction of Property Taxes and Statutory Levies from Rental Income
The applicant sought clarification on whether property taxes and other statutory levies paid by them could be deducted from the rental income to arrive at the value of rental income. According to Section 15(2) of the CGST Act 2017, "the value of supply shall include any taxes, duties, cesses, fees, and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier." The property tax levied by BBMP under the Karnataka Municipalities Act 1964 is not excluded from the value of the taxable supply. Therefore, the property tax cannot be deducted from the value of taxable supply of "Renting of Immovable Property" service.

Issue 2: Consideration of Notional Interest on Security Deposit for Rental Income
The applicant questioned whether notional interest on the security deposit should be considered for arriving at total income from rental. The draft rental agreement specified that the lessee would pay a monthly rent of ?1,50,000/- and an interest-free refundable security deposit of ?5 Crore. The security deposit, taken as a guarantee against damage to property, is not considered as payment for the supply of the Renting of Immovable Property Service (RIS) unless it is applied as consideration for the supply. Notional interest on the security deposit is considered part of the value of supply if it influences the value of the supply, i.e., the monthly rent. The security deposit is invariably collected in all leasing cases, and higher deposits generally result in lower monthly rents. Therefore, there is a nexus between the security deposit and the rent charged. The notional interest earned from the security deposit must be considered part of the value of supply if it influences the value of the supply and is subject to GST along with the monthly rent.

Issue 3: Entitlement to Tax Exemption under the General Exemption of ?20 Lakhs
The applicant inquired about their entitlement to tax exemption under the general exemption of ?20 lakhs. Section 2(112) of the CGST Act, 2017 defines total turnover in a State or Union Territory. The interest-free security deposit does not fall under the purview of supply as it is not considered a consideration. However, notional interest on the security deposit becomes part of consideration if it influences the value of supply. The applicant is entitled to the general exemption for registration purposes, provided their annual total turnover, including monthly rent and notional interest (if it influences the value of supply), does not exceed the threshold limit.

Ruling:
1. The applicant cannot deduct property taxes and other statutory levies for the purpose of arriving at the value of rental income.
2. Notional interest on the security deposit shall be taken into consideration for arriving at total income from rental only if it influences the value of the supply of RIS service, i.e., monthly rent.
3. The applicant is entitled to exemption of tax under the general exemption of ?20 lakhs, subject to the condition that their annual turnover, including monthly rent and notional interest (if it influences the value of supply), does not exceed the threshold limit.

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