The Goods and Services Tax (GST) Council, in its 54th meeting held in New Delhi, has made significant changes to the taxation of commercial property rentals. The council has decided to bring the renting of commercial properties by unregistered landlords to registered tenants under the Reverse Charge Mechanism (RCM), a move aimed at curbing revenue leakage.
Historically, GST on renting commercial properties was charged under the Forward Charge Mechanism (FCM), which required the registered tenant to pay GST directly. However, when the landlord was unregistered, this system led to substantial revenue losses for the government due to non-compliance and underreporting. By introducing the RCM for such transactions, the GST Council aims to tighten controls and enhance compliance among GST-registered tenants.
Shrinivas Rao, FRICS, CEO of Vestian, commented on the change: “The shift from Forward Charge Mechanism to Reverse Charge Mechanism for rentals from unregistered landlords is a strategic move to address the revenue leakage issue. Previously, when an unregistered landlord rented out commercial property to a registered tenant, GST was not effectively collected, leading to significant losses. The new RCM policy will help in bridging this gap and increase compliance.”
In addition to this, the GST Council has also clarified the tax liability on location charges and Preferential Location Charges (PLC) associated with residential, commercial, and industrial complexes. These charges will now be classified under construction services, leading to a reduced tax rate of 5% or 12%, down from the previous 18%. This adjustment is expected to alleviate friction between developers and tenants, promoting greater transparency and fairness in the sector.
Rao elaborated on this adjustment: “By bundling location charges under construction services and reducing the tax rates, the government is addressing concerns of high tax burdens and friction in the real estate sector. This move is likely to foster a more transparent and equitable environment for both developers and tenants.”
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The GST Council’s decisions reflect a broader effort to streamline tax regulations and ensure better compliance within the real estate sector. The new rules are anticipated to bring greater clarity and reduce administrative complexities for businesses and property owners alike.
