RCM on Rent of Commercial Property: The GST Council’s most recent notification altered the taxation of rental income from commercial property. This adjustment is anticipated to raise tax revenue for the government, but experts warn that it might increase renters’ expenses.
Following the Council’s 54th meeting on September 9, it was declared that the tenant would have to pay the GST through the reverse charge mechanism (RCM) if the property owner was not registered with the GST. This implies that the fee must be deposited by the tenant rather than the owner. Let’s examine the situation in more detail.
Understanding Reverse Charge Mechanism (RCM)
According to the Reverse Charge Mechanism (RCM), the person who receives the goods or services is responsible for paying the GST. The provider is not to blame.
Tenants are sometimes responsible for paying the GST tax under the RCM, which makes complying with business property taxes easier. This directly affects tax credits and remittances, so companies must be aware of the most recent GST rules.
This only indicates that the renter or lessee is responsible for collecting and paying the GST rather than the landlord. The concept was proposed to improve compliance and facilitate tax collection in industries where it is challenging to identify suppliers (e.g. property rental).
Previous GST Policy Regarding Commercial Property Rentals
The previous standard procedure was that GST was collected by the landlord/property owner from the tenant’s rent and then deposited to the government every month by filing a GST return.
This regulation allows you to rent out commercial spaces such as stores, cafes, offices, factories, etc. For these types of rental properties, the GST tax rate is 18%.
Compliance, registration, and other tax paperwork must be managed and filed by the landlord/owner alone. A landlord must register for GST and charge his tenants 18% more in advance GST if his total yearly rental income exceeds ₹20 lakh.
However, the previous system caused issues when the party attempted to enforce these regulations, such as when someone held the title to their house or small business without the required paperwork. Businesses that neglect to complete the necessary steps for GST registration, filing, and collections risk delaying tax payments, which results in non-compliance with the GST.
Learn More: NOC for GST Registration | How to Perfect Your NOC
Propose Change in GST Policy on Renting of Commercial Property
Owners no longer have to collect and pay GST to the government on rental income following the implementation of the Reverse Charge on Renting Commercial Property. Tenants will pay the government 18% GST on their rental income directly, and they will get ITC when they file their GST return that same month.
RCM’s Effects on Companies and Tenants
The Reverse Charge Mechanism (RCM) shifts the GST liability from owner to tenant, affecting rental transactions in various ways:
For Property Owner: No hassle of monthly GST collection and deposit. The tenant is now responsible for paying the taxes.
For Tenant: Tenants will file their GST returns in the same month that they pay their GST taxes and claim their input tax credit. Claiming ITC error-free will provide the renter with a sense of security. Owners can make mistakes or take too long to file GST returns, which prevents tenants from receiving ITC.
For Government: Previously, landlords who earned less than INR 20 lakh in rental income annually were excluded from GST. In the case of RCM, however, the GST burden is transferred to the tenants, who are required to pay GST regardless of the landlord’s yearly rental income. The government will collect more GST as a result of this.
Learn More: Rule 42 of GST Annual Return | Reversal of ITC
Conclusion
It can be difficult to navigate GST legislation, particularly in light of recent changes to the reverse charge process. Knowing your responsibilities is essential to avoiding fines and making the most of your tax preparation, whether you’re a landlord or a tenant.