Under the current indirect tax regime of Goods and Services Tax Act, 2017, even a tenant, having only tenancy rights in a property owned by another (the landlord) is not spared from the levy of GST.
To understand the implications of GST on surrender of tenancy, the following two questions are relevant; the first determines the application of the law while the second determines the quantum of liability.
- Whether “surrender of tenancy” is a service and covered within the scope of supply of service?
- If yes, what rate of tax would such surrender of tenancy attract
To understand the issue, the provisions of the Goods and Services Tax Act, 2017 along with the guidance provided in Circular No.44/18/2018-CGST [F. No. 341/28/2017-TRU] are required to be analysed.
- Service is defined under section 2(102) of the CGST Act. Accordingly, “service” means anything other than goods, money and securities but includes activities relation to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
- To determine whether the surrender of tenancy is a service, it could be argued that the words “includes activities relation to the use of money or its conversion by cash or by any other mode, from one for, currency or denomination, to another form, currency or denomination” which are broad and open ended, can be applied to include the surrender of tenancy in the ambit of service.
- The next question relevant to determine the issue under reply is Scope of Supply. Section 7 of the Act deals with the scope of supply. Sub-section (1) clause (a) states that scope of supply “includes” all forms of supply of goods or 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.
- Though Section 7 (1) is again an open ended provision, yet, from what is laid down in sub-clause (a), the scope includes all forms or actions that result in completion of a supply. Pertinent to note that clause (a) describes, sale, transfer, barter, exchange, rental and lease. It does not however include “surrender or relinquishment.” However, the word “disposal” can be treated to mean and include surrender or relinquishment as such surrender or relinquishment would result in disposal.
The Central Board of Indirect Taxes and Customs (“CBIC”) issued a circular dated 02-05-2018 to address doubts relating to tenancy rights. This is the only circular which addresses the issue of taxability of tenancy rights.
The circular refers to doubts raised on:
- 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; AND
- Further, 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.
The circular describes two nature of transactions pertinent to tenancy; firstly the tenant selling tenancy rights to an incoming tenant and sharing a percentage of the proceeds with the landlord AND secondly, the landlord paying to the tenant the prevailing tenancy premium to get the property vacated.
However, the circular deals with only the first nature of tenancy transaction, viz. sale or transfer of tenancy rights by an outgoing tenant to an incoming tenant.
On the second issue of surrender of tenancy rights for a consideration, the term surrender is used with reference to an outgoing tenant. Surrender of tenancy to a landlord without introduction of a new tenant is therefore not covered by the circular.
The entire emphasis in the clarificatory circular is with respect to the issue of surrender of tenancy by an outgoing tenant to facilitate its transfer to an incoming tenant. Surrender of tenancy by a tenant to a landlord which results in extinguishment of tenancy is not covered.
In my view, the transaction of surrender of tenancy does not amount to service and therefore does not attract provisions of Section 7(1)(a).
As far as the rate of tax is concerned, in my view the surrender of tenancy would attract GST at the rate of 18%.
