New GST Rules Impact Tenants Leasing Commercial Properties
Starting October 10, 2024, tenants leasing commercial properties in India will face new challenges due to the introduction of new rules by the GST department. Under these regulations, if the property owner is not registered under GST but the tenant is, the tenant will have to pay 18% GST through the reverse charge mechanism (RCM).
Potential Challenges for Tenants
This new rule could particularly impact small businesses operating under the composition scheme, such as small restaurants. Tenants under this scheme will be required to pay GST without being able to claim input tax credit (ITC), thus potentially increasing their working capital requirements.
Understanding the Mechanism
Chartered accountant Karim Lakhani provided insight into the mechanism behind the new regulations. Traditionally, property owners registered under GST would collect and pay the tax to the government via the forward charge mechanism (FCM). However, under the new rules, tenants must now pay 18% GST under the reverse charge mechanism (RCM) if the owner is unregistered but the tenant is registered.
Impact on Composition Scheme
The composition scheme offers benefits to small taxpayers with an annual turnover of less than Rs 7.5 million. However, these businesses are unable to claim input tax credit (ITC) on their expenses. With the implementation of the new rules, small manufacturers, traders, and service providers who lease commercial properties are likely to face higher costs.
Applicability of New Rules
The new GST rules do not apply if neither the tenant nor the property owner is registered under GST. However, if either both parties are registered or only the owner is registered, the GST follows the forward charge mechanism (FCM), where the property owner collects and pays the tax.
RCM Liability and Payment Methods
Given that most property owners are unregistered under GST, tenants will need to handle their reverse charge mechanism (RCM) liability using cash or cheque payments. They will be unable to utilize their input tax credit (ITC) balance for these mandated GST payments, explained Lakhani.
The new rules brought forth by the GST department will have a significant impact on tenants leasing commercial properties. With the burden of paying 18% GST through the reverse charge mechanism, tenants will need to develop strategies to handle additional costs and manage their working capital effectively. Small businesses operating under the composition scheme, in particular, might find it challenging to absorb these higher expenses without the benefit of input tax credit.
