What are the rules of GST on security deposits?

The Goods and Services Tax (GST) has significantly altered the tax landscape in India, impacting various sectors, including real estate. This article explores how GST affects rental income, focusing on advance deposit, interest free security deposits, and other related aspects.

Differences between Deposits and Advances

GST on Property Rental

GST (Goods and Services Tax) on property rentals in India depends on the type of property and its uses.

1. Commercial Property: Rentals of commercial properties, such as office spaces, shops, or factories, generally attract GST. The applicable rate is typically around 18%. Businesses renting these properties can also claim the GST paid as input tax credit, which can offset their GST liabilities on other transactions.
2. Residential Property: The rental of residential properties for residential purposes is exempt from GST. However, if a residential property is rented to a business or used for commercial purposes, GST is applicable. This includes situations where homes are rented to companies for use as guest houses or offices.

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GST on Security Deposits

• General Rule: GST is not levied on security deposits if they are collected as a guarantee for the performance of an obligation or the return of goods, and if the entire deposit or part is refundable without any deductions. The key aspect here is the intent of the deposit to be refundable.
• Non-refundable Deposits: If any part of the security deposit is non-refundable or is intended to be used as consideration for supply, GST becomes applicable. In such cases, the non-refundable portion of the deposit is treated like an advance payment for future supplies, and GST is charged accordingly.

Conditions for GST Applicability

• As Advance Payment: If the security deposit is used as an advance payment for the supply of goods or services, GST is applicable on the amount that is considered as an advance.
• Forfeiture of Deposit: If the security deposit is forfeited due to non-fulfillment of terms (e.g., cancellation of services), the forfeited amount is considered a supply, and GST is charged on it.
• Documentation and Invoicing: Proper documentation and invoicing are crucial. If a portion of the security deposit is to be treated as an advance or if any part is forfeited, it must be clearly documented in financial records and reflected in GST filings.

Example Scenarios

• Scenario 1: A business collects a security deposit for the rental of equipment. The full deposit is refundable at the end of the rental accounting period if the equipment is returned in good condition. GST Treatment: No GST is charged on the deposit as it is fully refundable and not part of the payment for the rental service.
• Scenario 2: A property rental agreement includes a security deposit, part of which is non-refundable to cover potential damages. GST Treatment: GST is charged on the non-refundable portion as it is considered an advance payment for the supply of the rental service.

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GST on Mobilization Advances

Taxable at Receipt: Unlike the previous tax regime where service tax was generally applicable upon invoicing or completion of a service, under GST, any advance received for the supply of services is taxable at the time of receipt.

• This means that GST must be paid as soon as a mobilization advance is received, rather than when the actual construction work is billed or completed.
• Calculation of GST: The GST on mobilization advances is calculated based on the rate applicable to the specific construction service being provided. The contractor must issue a receipt voucher at the time of receiving the advance and calculate GST on the advance amount.
• Adjustment Against Future Invoices: When subsequent invoices are raised for the construction services, the GST already paid on the advance is adjusted against the GST liability on these invoices. This adjustment ensures that GST is not paid twice on the same portion of the contract value.
• Documentation and Compliance: Proper documentation is crucial for compliance with GST regulations. Contractors must maintain detailed records of advances received, GST paid on these advances, and adjustments made against future tax liabilities. Receipt vouchers, tax invoices, and adjustment entries in the books of account are essential.
• Impact on Cash Flow: For contractors, paying GST on mobilization advances can impact cash flow since tax must be paid upfront, well before the income from the project is realized. Planning for these flow of money impacts is a critical aspect of financial management in projects involving mobilization advances under GST.

GST Registration Requirements for Landlords

• Threshold for Registration: Landlords who rent out property to businesses are required to register under GST if their total turnover exceeds the threshold limit for applicability. The current threshold for GST registration across most of India is INR 20 lakhs. However, for special category states, typically those in the North-Eastern and hill states, the threshold is INR 10 lakhs.
• Type of Rental Income: The requirement for GST registration is specifically applicable if the rental income is from leasing or renting out properties for business or commercial purposes. Residential properties rented for personal use are not subject to GST unless they are leased to businesses.
• Aggregate Turnover: The threshold limit considers the aggregate turnover, which includes the sum of all taxable, non-taxable, exempt, and export supplies made across India. For landlords owning multiple properties or engaged in other business activities under the same PAN, the cumulative revenue from all activities and properties is considered to determine if the threshold has been crossed.
• Mandatory Registration for Interstate Supplies: If a landlord is involved in inter-state supply of services, such as renting properties located in different states, GST registration becomes mandatory irrespective of the turnover.
• Voluntary Registration: Landlords have the option to register for GST voluntarily, even if their turnover does not exceed the threshold. This can be beneficial as it allows the landlord to claim input tax credit on expenses related to the rental activity, such as maintenance and repair services.
• Consequences of Non-Compliance: Failing to register for GST when required can lead to penalties, which include a fine and interest on the due tax amounts. It's crucial for landlords to assess their requirement to register under GST and comply accordingly.

Place of Supply for Rental Services

• Basic Rule: The place of supply for rental services of immovable property, including commercial, industrial, or residential properties, is where the property is located. This rule is straightforward and applies regardless of where the supplier or the customer are located.
• Tax Implications: If both the supplier and the recipient are in the same state: CGST and SGST are applicable.
  If the supplier and the recipient are in different states: IGST is applicable.
• Example 1: A landlord based in Mumbai rents out a commercial space to a business that is also located in Mumbai. The place of supply is Maharashtra, and therefore, both CGST and SGST are applicable.
  Example 2: A landlord based in Delhi rents out a property for commercial use to a business located in Karnataka. Since the landlord and tenant are in different states and the property is rented across state lines, IGST is applicable.
• Documentation and Compliance: For GST compliance, it is essential to correctly determine the place of supply in order to apply the appropriate tax rate. Invoices issued for rental services must clearly mention the place of supply along with the type of GST charged (CGST, SGST, or IGST).
• Special Cases: There are some special scenarios where the place of supply might involve additional considerations:
• Rental of equipment or vehicles: If the rental is for movable property like equipment or vehicles, the place of supply could differ and would usually be the location of the recipient.
  Events and functions: For properties rented out for events or functions, the place of supply remains where the property is physically located.
• Importance of Accurate Determination: The accuracy of determining the place of supply is critical because errors can lead to tax mismatches, incorrect tax payments, and potential penalties during audits. It ensures that the correct tax authority receives the revenue and that the business complies with tax regulations without discrepancies.

Application of GST on Commercial Rentals

• GST Applicability: GST is applicable to all commercial rental income. This includes any property that is rented out for business or commercial purposes. The introduction of GST replaced the earlier service tax that was applicable to commercial rentals.
• Tax Rate: The standard GST rate for commercial property rentals is generally 18%. However, this rate can be subject to changes based on government policy, so it is essential for property owners and tenants to stay updated with the latest tax rates.
• Taxable Event: Under GST, the taxable event is the supply of services, which, in the context of commercial rentals, occurs when the property is rented out to tenants. The landlord must collect GST from the tenant, which is then remitted to the government.
• Input Tax Credit (ITC): One of the significant advantages under GST for tenants is the ability to claim input tax credit. This means that businesses can deduct the GST paid on commercial rent from their total GST liability. However, to avail of this benefit, both the landlord and tenant must be registered under GST.
• Mandatory Registration: Landlords leasing out commercial properties must register for GST if their total turnover exceeds the threshold limit (currently set at INR 20 lakhs across India, except for North-Eastern and hill states, where it is INR 10 lakhs). Even if the turnover from rental alone does not exceed this threshold, the sum of all taxable supplies under the same PAN counts towards this limit.
• Reverse Charge Mechanism (RCM): Normally, the supplier of services (the landlord) is responsible for collecting and paying GST. However, in specific cases stipulated by GST laws, the responsibility can shift to the recipient under the Reverse Charge Mechanism. This is generally not applicable to commercial rentals but is a critical aspect to understand in the broader scope of GST.
• Compliance and Documentation: Landlords must issue GST-compliant invoices to their tenants. These invoices should detail the amount of rent and the GST charged. Landlords and tenants must also ensure that their GST returns are filed on time, detailing all transactions related to commercial rentals.
• Impact on Lease Agreements: GST implications should be clearly addressed in the lease agreements, specifying who bears the tax burden and how it is calculated. Transparency in this aspect helps avoid conflicts and ensures clear financial dealings between the landlord and the tenant.

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Calculating GST

Calculating GST on rental income, especially for commercial properties, involves a straightforward process. Here’s a step-by-step guide to help you understand how to determine the GST due on the rental income you receive:

Step-by-Step Guide to Calculating GST on Rental Income

• Determine the Applicable GST Rate

First, identify the GST rate applicable to the property being rented out. For commercial properties, the typical GST rate is 18%. However, this rate can vary based on specific circumstances or changes in tax law, so it's important to confirm the current rate.

• Apply the GST Rate to the Monthly Rent

Calculate the GST amount by applying the GST rate to the monthly rent. For instance, if the monthly rent is INR 1,00,000 and the GST rate is 18%, the GST on the rent would be calculated as follows:

• GST Amount = Monthly Rent × GST Rate
• GST Amount = 1,00,000 × 18% = INR 18,000

• Include Any Taxable Advances

If any advances are received that are considered taxable (usually when they are non-refundable or part of them is non-refundable), these should also be included in the GST calculation. Assume you received an advance of INR 2,00,000, on which GST needs to be calculated. Here's how you would do it:

• GST on Advance = Advance Amount × GST Rate
• GST on Advance = 2,00,000 × 18% = INR 36,000
• This GST on the advance is due at the time the advance is received, separate from the monthly rental GST calculations.

Conclusion

GST has streamlined tax administration and compliance but also increased the tax burden on certain segments of the rental market. Knowing of various critical elements, including the differences between deposits and advances, the applicability of GST on different types of property rentals, and specific tax obligations for landlords. It's essential for property owners, tenants, and contractors to be aware of how GST impacts security deposits, mobilization advances, and overall rental income taxation.

Proper compliance with GST registration requirements and accurately determining the place of supply are crucial for ensuring that the correct tax amounts are charged and remitted.

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