GST on rental property may slow down market temporarily, claim property pundits

Goods and Services Tax (GST) on residential projects could lead to a slight slump or rental stagnation, but the market would acclimate to new tax dynamics, predict property pundits. Residential rents have been brought under the net of Goods and Services Act from July 18. GST will also be payable by tenants on a reverse charge basis to the Government.

Will GST on rent affect expansion?  

The new taxation could have a significant impact on corporate rentals. Vivek Rathi, Director, Research at Knight Frank India says, "The recent decision by the GST Council to impose an 18 per cent GST on residential properties rented to individuals who are registered under GST will have a significant impact on the rental real estate market in India. The decision may hinder the expansion of rental real estate in India by increasing the tax burden on businesses that rent out residential properties to use as accommodation and guest houses for their employees. While the change hurts businesses and GST-registered individuals, it has no effect on people whose rental transactions fall below the threshold required to be considered a registered GST member."

Which markets are likely to be affected? 

Residential rental being an inherent demand, taxation may slow down but will not suppress the market for long. Piyush Bothra, Co-Founder and CFO, Square Yards says, “The amendment to bring residential dwellings under 18 per cent GST ambit from July 18 is a bold move and will impact the demand for rental housing. It won’t be severe as the largest market for tenants is amongst the salaried class, who do not get impacted by this change. It would not have any impact on the total outgoing for the self-employed professionals and small business owners. However, it is important to note that residential leasing is an inherent demand which will not evaporate merely by higher taxation. Certainly, there will be a marginal slump or rental stagnation and rental yields in top cities can moderate in the coming months, as the market acclimates to the new tax-induced dynamics.”

Who will be hit more, corporates or individuals? 

Corporates are likely to be hit more by the new taxation than individuals. Vivek Jalan, Partner, Tax Connect Advisory says, ”This would have a big impact on corporates which take guest houses on rent or which take residential houses on rent for use of their employees or in any other case. Going by experience in such cases, ITC of GST on this rent paid by corporates may be disputed by the GST Department arguing on the basis of Section 17(5)(g) of The CGST Act 2017 where the ITC of GST paid for any services for personal consumption is blocked.”

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