GST on Tenancy Rights

The renting of property is very common and we know that the renting of immovable property is considered as supply of service under GST.  The person who uses the property and pays the rent to the owner is known as tenant. The owner & tenant usually enter into an agreement i.e., rent agreement by mentioning the rights and duties of both the parties and such agreement is duly signed by both parties. Sometime it is seen that the owner of the property provides the right to tenant to sell their tenancy rights to third person against tenancy premium. The said transfer of tenancy rights against tenancy premium is also known as “pagadi system”.  In respect of transfer of tenancy rights by the tenant to another person in lieu of the consideration in form of tenancy premium, the question arises what would be the GST implications of such tenancy premium.

Before going into detailed discussion let us discuss some practical aspects of such “pagadi system”. In this system the tenant acquires, tenancy rights in the property against payment of tenancy premium (pagadi). The landlord may be owner of the property but the possession of the same lies with the tenant. The tenant pays periodic rent to the landlord as long as he occupies the property. The tenant also usually has the option to sell the tenancy right of the said property and in such case has to share a percentage of the proceeds with owner of land, as laid down in their tenancy agreement. Alternatively, the landlord pays to tenant the prevailing tenancy premium to get the property vacated.

For the purpose of better understanding about the concept of tenancy rights and transfer of tenancy rights, let us discuss an example;

Suppose Mr. Ram who is the owner of property has given the property on rent to Mr. Shyam on monthly rent let’s say 15,000 p.m. As per the agreement Mr. Shyam has also paid Rs.5,00,000 to Mr. Ram to get some rights in Ram’s property. In such situation Rs. 5,00,000 would be called Tenancy Premium. However, it is important to note that Mr. Ram would not lose the title as the owner of the property. This situation can be called as the tenancy premium received by the landlord (Mr. Ram) from incoming tenant (Mr. Shyam) against transfer of tenancy rights in the property by the landlord (Mr. Ram) to the tenant(Mr. Shyam).

Now, Mr. Shyam wants to sell such tenancy rights to Mr. Sohan against the consideration which is also called tenancy premium. Similarly, in case Mr. Shyam vacates the property without transferring the tenancy rights to Mr. Sohan, in such situation also Mr. Shyam will receive the tenancy premium from Mr. Ram. This situation can be called as tenancy premium received by the outgoing tenant from the incoming tenant or from landlord on vacating the premises.

From the above detailed discussion about tenancy rights and tenancy premium, it can be seen that the following types of income can be generated in those transactions:

1. The tenancy premium received by the landlord from incoming tenant against transfer of tenancy rights in the property by the landlord to the tenant.

2. Tenancy Premium received by the outgoing tenant from the incoming tenant or from landlord on vacating the premises.

As we know that the GST is leviable on supply of goods or service or both. Hence for the leviability of GST on the transfer of tenancy rights we have to check whether it covered under the scope of supply or not. As per section 7 of CGST Act, 2017 the term “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. Further, Schedule I contains the list of the activities to be treated as supply even if made without consideration.

Also the Schedule II of CGST Act 2017, contains the activities or transactions to be treated as supply of goods or supply of services. As per clause (a) of para 2 of Schedule II “any lease, tenancy, easement, licence to occupy land is a supply of services” Thus it can be said that transfer of tenancy rights is supply of service under GST. Accordingly, the GST would be applicable on the consideration received by transfer of such tenancy rights.

However, it is important to note that as per serial number 12 of Notification No. 12/2017 CT(R) the services by way of renting of residential dwelling for use as residence are exempted from GST, except where the residential dwelling is rented to a registered person.  Accordingly, it can be said that where the tenancy rights are relating to residential dwelling let out for use as residence purpose, it won’t attract GST.

The same was also clarified by the CBIC vide Circular Number 44/18/2018 dated 2nd May, 2018 that the activity of transfer of "tenancy rights" is squarely covered under the scope of supply and taxable under GST.  The transfer of tenancy rights to a new tenant against consideration in the form of tenancy premium is taxable. However, renting of residential dwelling for use as a residence is exempt. Hence, grant of tenancy rights in a residential dwelling for use as residence dwelling against tenancy premium or periodic rent or both is exempt. As regards services provided by outgoing tenant by way of surrendering the tenancy rights against consideration in the form of a portion of tenancy premium is liable to GST.

Thus from the above detailed discussion it can be concluded that;

Conclusion: The activity of transfer of ‘tenancy rights’ is covered under the scope of supply and is liable under GST. Also the transfer of tenancy rights to a new tenant against consideration in the form of tenancy premium is taxable and hence GST is payable on the same. Renting of residential dwelling for use as a residence is exempt.

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.