RCM on Rent of Commercial Property: A Complete Guide
- Bhavika Rajput
- Apr 2
- 7 min read
The Reverse Charge Mechanism (RCM) on business Rent is when the receiver renter is responsible for paying GST on business rent. RCM on business rent happens when the tenant is registered, and the landlord is not. During the recent GST Council Meeting, the government clarified the RCM on business rent. As per the 54th GST Council Meeting, the Reverse Charge Mechanism (RCM) will impose GST on commercial buildings rented to registered individuals by unregistered individuals.
Table of Contents
What is RCM under GST?
A provision in the Goods and Services Tax (GST) system known as the Reverse Charge Mechanism (RCM) shifts the burden of paying the tax from the service provider to the recipient. It implies that the tenant must pay GST to the government if the landlord is not a business owner and the tenant is registered as a business using the space as a commercial address. However, GST is not applicable if the tenant is a registered business owner and the property is utilized exclusively for domestic purposes with no income. Only when monthly rental revenue above Rs. 50,000 is RCM imposed. This clause does not apply to any sum below this threshold.
RCM under GST for commercial properties
When it comes to properties constructed especially for commercial use, things get a little trickier. Both the landlord and the renter are typically registered businesses. Who then covers the GST? As is customary, the landlord is liable for paying the standard applicable rate of 18%. Per Entry No. 16 of Notification No. 11/2017 (Central Tax Rate), dated June 28, 2017, this duty is covered by the Forward Charge Mechanism, or FCM. Information regarding how GST gets computed on commercial real estate.
Mechanism of Forward Change
The Forward Charge Mechanism shifts the burden of paying Goods and Services Tax (GST) on the landlord or property owner in commercial real estate. GST is charged to rental income when a commercial property gets rented out. The "forward charge" method imposes GST on commercial real estate. It implies that GST on rental income must paid by the registered service provider, typically the landlord or property owner. There is no reverse charge process if the landlord is not registered, and the government pays the GST directly on a forward charge basis. The Forward Charge Mechanism is exclusive to commercial property rentals. Under this heading are residential residences registered as business addresses and provide revenue.
The Way It Operates:
Landlord collects GST: The landlord collects GST by charging the renter the whole amount of rent plus the applicable GST rate, typically 18%.
Government GST payment by landlord: The landlord is responsible for completing GST returns and submitting the collected tax to the government.
Direct GST payment by the renter: The government does not receive direct GST payments from the tenant. The rent they pay the landlord already includes the GST liability.
The Forward Charge Mechanism's advantages include:
Tenant compliance made easier: Tax compliance is made easier as tenants are exempt from filing GST reports and paying GST directly.
Better tax collection: The government can collect taxes more effectively thanks to the forward charge mechanism.
Transparency: The rental invoice makes the transaction more transparent by clearly stating the GST amount.
Situations
Let's examine a few situations where RCM of FCM may billed under GST:
When neither party has a registration
Situation: The owner and tenant are not registered.
Impact: Since there is no RCM or Forward Charge Mechanism [FCM], GST is not applicable.
Unregistered Tenant, Registered Owner
Situation: The owner gets registered under GST, but the tenant is not.
Impact: Under FCM, GST is applicable. GST is collected and paid by the owner.
Both sides Registered
Situation: The owner and tenant are both GST registered.
Impact: Regular tax treatment is possible because GST applies under FCM.
Unregistered Owner, Registered Tenant
Situation: The owner is not registered, but the tenant is.
Impact: Under RCM, GST is applicable, and the renter has to pay the government directly.
Unregistered Owner, Registered Composition Taxpayer Tenant
Situation: The owner is not registered under GST, while the tenant gets registered as a composition taxpayer.
Impact: According to the press release from the 55th GST Council Meeting, RCM is not applicable.
Impact on the Commercial Real Estate Sector
For Owners of Small Properties: If tenants prefer to rent from GST-registered landlords to avoid the hassle of RCM, small landlords that lease commercial buildings to registered businesses may see a decline in demand.
For Big Companies: The market dynamics in the commercial real estate industry may change if larger companies renting commercial premises choose to work with registered landlords.
Impact on Landlords and Tenant
For Landlords Who Are Registered: If the landlord is GST registered, the renter pays the GST together with the rent, and the landlord charges the tenant 18% GST on the rent.
For Unregistered Property Owners: If the landlord is not GST registered, the RCM is applicable, and the tenant, if registered, is in charge of paying the GST to the government directly.
It affects small landlords that rent commercial properties to registered enterprises but do not meet the GST registration criteria.
Cash Flow Impact on Tenants
RCM may impact the tenant's cash flow because they must pay the GST on the rent to the government directly rather than to the landlord as part of the rent. Tenants who qualify for ITC can deduct this GST obligation from their production tax obligation, maintaining a balanced tax burden overall.
ITC for Tenants
If the tenants use the property for business purposes, they receive an Input Tax Credit (ITC) on the GST paid under RCM. Businesses can offset the GST paid under RCM against their GST liability on other supplies, reducing the effective cost of renting for them.
Conclusion
Tenants, landlords, and the real estate industry are all impacted by the application of RCM to commercial rent. Even when landlords are not registered, it guarantees that GST is paid on rental transactions even though it transfers the tax burden from landlords to tenants. RCM entails additional compliance and cash flow management duties for tenants, particularly companies; nevertheless, the availability of ITC can help defray the GST paid under RCM. In addition to favouring registered landlords in leasing decisions, the RCM on business rent also enables the commercial real estate market to comply with tax laws.
FAQ
Q1. What is the reverse charge for commercial property rental?
The Reverse Charge Mechanism (RCM) on business Rent is when the receiver renter is responsible for paying GST on business rent. RCM on business rent happens when the tenant is registered and the landlord is not. During the recent GST Council Meeting, the government clarified the RCM on business rent.
Q2. Is GST applicable on the rent of commercial property?
The GST (Goods and Services Tax) is applied at a rate of 18% to the rent of commercial real estate in India. This is true when leasing out places like stores, offices, and warehouses. However, GST registration and collection on rental income do not apply to small taxpayers with an annual turnover of less than Rs. 20 lakhs.
Q3. How to show rent RCM in GSTR1?
The supplier must include this information in GSTR-1 Table 4B (Outward Supplies Attracting Tax on Reverse Charge Basis). Reverse charge summary purchases must be reported by the recipient. According to GSTR-3B, the recipient must disclose in Table 3.1 (D) (inward supplies susceptible to reverse charge).
Q4. What is the GST rate in case of renting commercial properties?
GST gets computed at 18% (9% CGST & 9% SGST) for intrastate supplies and 18% IGST for interstate services. GST is evaluated using the taxable value.
Q5. Is GST applicable for religious trusts or registered charitable trusts?
Religious and registered charitable trusts intended for the general public are exempt from GST.
Q6. Is GST registration necessary in case of renting out property for commercial purposes?
For service providers exclusively, the GST registration threshold is Rs. 20 lakhs. Therefore, GST registration is required if the rental revenue from commercial properties exceeds Rs. 20 lakhs.
Q7. Can ITC be availed in case GST is charged on rent?
One may receive an ITC on GST paid on rent if all requirements outlined in section 16 of the CGST Act 2017 are met, including disclosure of the tax paid in the returns and confirmation that GST gets paid.
Q8. Who is liable to pay GST under RCM for commercial rent?
The tenant (recipient of service) is liable to pay GST under the Reverse Charge Mechanism (RCM) instead of the landlord.
Q9. Does RCM on rent apply to all commercial properties?
RCM applies only if the landlord is an unregistered person and the tenant is a registered taxpayer under GST.
Q10. Can landlords claim ITC on rent subject to RCM?
No, since the GST is paid by the tenant under RCM, the landlord cannot claim the Input Tax Credit (ITC) on it.
Q11. How is GST calculated on commercial rent under RCM?
GST is charged at 18% on the rent amount, and the tenant must deposit it directly to the government.
Q12. Are small businesses renting offices liable for RCM?
If the tenant is registered under GST and the landlord is unregistered, RCM applies, irrespective of business size.
Q13. What happens if the tenant fails to pay GST under RCM?
Non-compliance may lead to penalties, interest charges, and disallowance of ITC claims by the tax authorities.
Q14. Does RCM on rent apply to co-working spaces?
Yes, if a registered tenant rents a co-working space from an unregistered landlord, RCM is applicable.
Q15. Is RCM applicable if the landlord is registered under GST?
No, if the landlord is registered, they must collect and deposit GST themselves, and RCM does not apply.
Q16. How should RCM on rent be reported in GST returns?
The tenant must report the GST paid under RCM in GSTR-3B under the ‘Reverse Charge’ section.
Q17. Can an unregistered business renting commercial property avoid RCM?
Yes, if the tenant is also unregistered, RCM does not apply as it only affects registered GST taxpayers.
Q18. Does RCM apply to residential property rented for commercial use?
If a residential property is rented for commercial purposes, it is treated as a commercial lease, and GST under RCM may apply.
Q19. Can the tenant claim ITC on GST paid under RCM?
Yes, if the tenant is using the rented property for business purposes, they can claim Input Tax Credit on the GST paid under RCM.
Q20. What documents are required for compliance with RCM on rent?
The tenant must issue a self-invoice, report it in their GST returns, and maintain proper records of tax payments.
Q21. Are there any exemptions from RCM on rent of commercial properties?
Certain government-notified exemptions apply, such as rental income below the GST threshold limit.
Q22. How frequently should tenants pay GST under RCM for rent?
GST under RCM should be paid monthly while filing GSTR-3B, ensuring timely compliance.
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