GST Tenancy Rights

GST Tenancy Rights

Tenant-right is a term in the common law system expressing the right to compensation which a tenant has, either by custom or by law, against his landlord for improvements at the termination of his tenancy.

The transfer of tenancy rights against tenancy premium which is also known as “pagadi system” is prevalent in some States. Pagdi system is similar to any other renting system that is prevalent across the world. Traditionally Pagdi system was launched before independence, in order to avoid paying excessive taxes to the British.

In simple term, the system is similar to any other renting system that is prevalent across the world i.e. landlord and a tenant. In this system the only conflicting factor is that, the tenant becomes a part owner of the house and not of the land. The landlord may be owner of the property but the possession of the same lies with the tenant.

This tenant continues to pay rent to the owner as long as he is not sub-renting the premises. Additionally, the tenant has the option to sell the tenancy right of the said property and in such a case has to share a percentage of the proceeds with owner of land, as laid down in their tenancy agreement. Alternatively, the landlord pays to tenant the prevailing tenancy premium to get the property vacated.

In case of sub renting, the outgoing tenant and the owner of the property shall share the rental amount between them.

Issued Involved in Tenancy Rights under GST

  1. Whether transfer of tenancy rights to an incoming tenant, consideration for which is in the form of tenancy premium, shall attract GST when stamp duty and registration charges is levied on the said premium, if yes what would be the applicable rates?
  2. In case of transfer of tenancy rights, a part of the consideration for such transfer accrues to the outgoing tenant, whether such supplies will also attract GST?

Government vide circular no. 44/18/2018-CGST dated 2nd May, 2018 has come up with following clarification, against the above issues raised against them.

The government has clarified that the activity of transfer of tenancy right against consideration in the form of tenancy premium is a supply of service and hence liable for payment of GST.

Further it has been clarified that, as per section 9(1) of the CGST Act, there shall be levied central tax on the intra-State supplies of services and the scope of supply includes all forms of supply of goods and services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business and also includes the activities specified in Schedule II.

It is a form of lease or renting of property and such activity is specifically declared to be a service in para 2 of Schedule II i.e. any lease, tenancy, easement, licence to occupy land is a supply of services.

Further, the said circular also clarified that the contention that since stamp duty and registration charges is levied on such transfers of tenancy rights, the said transaction thus should not be subjected to GST, is completely irrelevant.

According to the clarification, merely because a transaction or a supply involves execution of documents which may require registration and payment of registration fee and stamp duty, would not preclude them from the scope of supply of goods and services and from payment of GST. The transfer of tenancy rights cannot be treated as sale of land or building declared as neither a supply of goods nor of services in para 5 of Schedule III to CGST Act, 2017. Thus a consideration for the said activity shall attract levy of GST.

Further, the CBIC has clarified that grant of tenancy rights in a residential dwelling for use as residence against tenancy premium or periodic rent or both is exempt.

The conclusion of the entire clarification issued by CBIC is as under:

  • The activity of transfer of ‘tenancy rights’ is covered under the scope of supply and is liable under GST.
  • Transfer of tenancy rights to a new tenant against consideration in the form of tenancy premium is taxable and hence GST is payable on the same.
  • Renting of residential dwelling for use as a residence is exempt.
  • Services provided by outgoing tenant by way of surrendering the tenancy rights against consideration in the form of a portion of tenancy premium is liable to GST.

GST Circular on Tenancy Rights

The GST circular on tenancy rights is reproduced below for reference:

GST Circular on Tenancy Rights

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