House or Hurdle? Decoding GST ITC on Employer-Hired Flats
The debate over input tax credit (ITC) on residential premises rented by a company to house its employees or consultants is heating up in the GST arena. With corporates increasingly offering accommodation to attract talent, the question arises: Can GST paid on such rentals be claimed as ITC, or is it barred as a personal consumption expense under Section 17(5)(g) of the CGST Act, 2017?
1. The Business Model in Question
A company proposes to hire residential flats in its own name to provide accommodation to employees or consultants. The flats may be given free of cost (FOC) or on a chargeable basis, depending on the terms negotiated with each individual. The employment or consultancy contracts may or may not expressly mention this facility.
The company wishes to know whether GST paid on the rent can be availed as ITC, arguing that the accommodation is provided in the course or furtherance of business.
2. Legal Framework
a. Section 17(5)(g) CGST Act, 2017
"Input tax credit shall not be available in respect of goods or services or both used for personal consumption."
This is the heart of the dispute: does providing residential flats to employees qualify as "personal consumption," or can it be defended as a business expense?
b. Notification No. 13/2017-Central Tax (Rate) as amended by Notification 05/2022
Entry 5AA requires reverse charge payment of GST when a residential dwelling is rented to a registered person.
→ This clearly brings the company-landlord transaction into the tax net.
c. Circular No. 172/04/2022-GST (06.07.2022)
The Circular clarifies that perquisites provided to employees under a contractual agreement are not treated as a supply by the employer to the employee, hence no GST is payable on recoveries.
d. Section 2(93) - Definition of "Recipient"
The recipient is the person liable to pay consideration. Here, the company-not the employee-is the recipient of the renting service.
3. Key Issues for Determination
1. Nature of Use - Is the residential dwelling used in the "course or furtherance of business," or for "personal consumption"?
2. Recipient Test - Since the company is the recipient of the service, should the test of usage be applied in the context of the company or the employee?
3. Perquisite vs. Commercial Service - Does the fact that accommodation may be free or chargeable influence ITC eligibility?
4. The "Disallow" Argument: Personal Consumption Prevails
Opponents of ITC raise several red flags:
a. Off-Hours Usage
Employees use the flats primarily outside working hours-evenings, weekends, holidays. The core purpose is rest and recreation, not business operations.
b. Family Occupation
Spouses, children, or dependents also enjoy the premises. Their presence has no nexus with the company’s business.
c. Risk of Revenue Leakage
Allowing ITC could open the floodgates for claims on furnishings, electronics, renovations, and maintenance-items clearly for personal enjoyment.
d. Judicial Precedents
Advance rulings have often denied ITC:
Kandla Port Trust [2019(08)LCX0124 (AAR Gujarat)] - No ITC on flats rented for employees.
Hotel Stay Perquisites [2018(09)LCX0106 (AAR)] - No ITC on GST for hotel rooms given free to senior management.
The reasoning: personal consumption overrides business necessity.
5. The "Allow" Argument: Business Nexus Established
Supporters of ITC contend that business realities demand a broader view.
a. Talent Retention &Business Continuity
Industries operating in remote or high-cost urban areas (mines, research stations, tier-1 cities) often cannot hire or retain staff without offering housing. Accommodation directly enables employees to perform their work.
b. RCM Inclusion Implies Business Use
When the government amended Notification 12/2017 to withdraw the exemption if the tenant is a registered person, it acknowledged that such rentals are often non-personal. If the intent was always personal, exemption would have continued.
c. Recipient Perspective
Under Section 2(93), the company is the recipient paying the landlord. The test of "course or furtherance of business" must be applied to the company’s purpose-not the employee’s. The company’s objective is to run its business efficiently, not to provide personal gratification.
d. Circular 172/04/2022 Protection
The Circular shields the company from GST on recoveries made from employees when the accommodation is a contractual perquisite. This supports the view that such facilities are part of the employment package, not a personal favour.
6. Practical Scenarios
| Scenario | GST Treatment | ITC Position |
| FOC accommodation expressly mentioned in appointment letter | GST payable by company under RCM | ITC claimable, but litigation risk exists |
| Chargeable accommodation with nominal recovery | GST payable under RCM; recovery not taxable (per Circular 172) | ITC limited to net cost borne by company (per Tata Motors 2020(08)LCX0118 AAR) |
| Accommodation provided without contractual clause | GST under RCM | Weak ITC claim; may be viewed as gratuitous personal consumption |
7. Risk Matrix for Businesses
|
Risk Factor |
Impact |
| Absence of written contract | High risk of denial under Section 17(5)(g). |
| Employee recoveries not properly documented | Potential GST on recoveries; ITC disallowance. |
| Mixed-use properties (guest house + staff housing) | Apportionment required. |
8. Litigation Landscape
While advance rulings such as Kandla Port Trust lean against ITC, they are not binding precedents beyond the applicant. Courts have yet to deliver a definitive High Court or Supreme Court ruling directly on Section 17(5)(g) in this precise context.
However, cases on analogous benefits (e.g., staff transport, food coupons) reveal a pattern: where the employer establishes a clear business necessity, courts have occasionally allowed ITC despite personal enjoyment by employees.
9. Compliance Checklist for Companies
To strengthen the ITC claim, businesses should:
1. Execute Written Agreements - Incorporate the housing facility in the employment or consultancy contract to establish business nexus.
2. Maintain Reverse Charge Documentation - Pay GST under RCM on time and record it properly in GSTR-3B.
3. Segregate Recoveries - Clearly reflect employee recoveries (if any) in books and deduct from ITC proportionately.
4. Avoid Over-Claiming - Exclude furniture, appliances, or luxury renovations unless directly linked to business use.
10. Balanced Conclusion
The law currently stands on a razor’s edge. On one side, Section 17(5)(g) prohibits ITC on personal consumption. On the other, the RCM amendment and the recipient definition favour a business nexus approach. In practice:
ITC is claimable where accommodation is a documented employment/consultancy perquisite and the company pays GST under RCM.
Litigation risk remains high, as revenue authorities may argue personal consumption.
Having a contractual obligation, proper documentation, and limiting claims to the company’s net cost significantly improve the chances of defending ITC.
Key Takeaways
ITC can be claimed but is not risk-free. Prepare for departmental scrutiny.
Documentation is king. Explicit employment clauses and RCM compliance are critical.
Employee recoveries reduce ITC. Claim only the amount actually borne by the company.
Future judicial clarity is awaited. Until higher courts settle the issue, businesses must weigh the tax benefit against potential disputes.
Final Word
Providing residential accommodation is no longer a mere HR perk; it is often a strategic business necessity. While the GST framework recognises this reality by taxing the renting of residential dwellings to registered persons, it stops short of expressly allowing ITC. Companies willing to claim the credit should fortify their position with robust agreements, meticulous compliance, and a readiness to defend their claim before the authorities.
Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.