Are you a landlord who earns rental income from commercial properties? If your earnings cross a certain threshold a year, you may have to register for the Goods and Services Tax (GST) and start charging tax on rent.
While renting out residential properties remains tax-exempt, commercial leasing comes with specific GST rules that every professional landlord must understand. As a professional landlord in India, understanding the nuances of the Goods and Services Tax (GST) is crucial to ensure compliance and avoid potential penalties.
So, when do you need to register, and how does GST affect your rental business? Let’s break it down.
Consider total services income, not just rent
According to chartered accountant Deepak Rao, “Any service provider, including landlords, whose annual income from services exceeds ₹20 lakh is required to register for GST.”
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This threshold applies to the aggregate income from all services provided, not just rent. So if your total income from renting properties and any other services surpasses ₹20 lakh in a financial year, GST registration is mandatory.
Residential properties for commercial use
As mentioned above, renting out a residential dwelling for residential purposes is exempt from GST, irrespective of the landlord’s income. However, if the residential property is used for commercial purposes, there may be implications for GST.
Commercial rentals: Reverse charge mechanism
For commercial property rentals, whether GST applies depends on the registration status of both the landlord and the tenant. If an unregistered landlord rents out a commercial property to a registered tenant, the reverse charge mechanism (RCM) applies. In this scenario, the tenant is liable to pay 18% GST directly to the government.
Forward charge mechanism
Conversely, if the landlord is GST-registered, they must charge GST on rent for commercial properties. The tenant pays the rent amount plus 18% GST to the landlord, who then remits the GST to the government. This is known as the forward charge mechanism. Deepak Rao explained, “If the landlord is GST-registered, they will charge rent plus GST on commercial property, and the tenant will pay the full amount including GST.”
Consequences of evading GST
As a professional landlord, it’s essential to maintain accurate records and ensure timely GST filings to remain compliant.
Failure to comply with GST rules can have severe consequences. If a landlord evades tax, wrongly avails of input tax credit, or wrongly claims a refund exceeding ₹5 crore, they could face up to five years in prison and a fine. If the tax evaded is between ₹2 crore and ₹5 crore, they could face up to three years in prison and a fine.
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Deepak Rao said, “Non-compliance with GST laws can lead to severe penalties, including imprisonment for significant tax evasion cases. It is crucial for landlords to ensure proper GST registration and adherence to tax filing requirements.”
Final thoughts
Whether you have to register for GST as a professional landlord depends on the nature of your rental properties and your annual income from them. Staying informed and compliant with GST regulations is vital for the smooth operation of your rental business. Failing to do so could have severe financial and legal repercussions.
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