In aid to tenants, AAR permits tax credit score on GST paid on upfront lease premium

“Typically, tax authorities are disallowing enter credit score on upfront lease premium on the bottom that very same is in relation to immovable property, therefore restricted, or the place tenants undertake some renovation or building work earlier than they use the property, the credit score is denied on the logic of enter service of lease getting used for building,” stated Harpreet Singh, associate at KPMG India.

Enter tax credit score is a mechanism below GST the place a part of the tax paid might be set off in opposition to future tax legal responsibility. Tamil Nadu AAR in a ruling on July 27 had stated, “The upfront premium made is the lease leases as per the allotment order/letter of Chennai Port Trusts and it’s nothing however lease leases paid for the companies of ‘renting of immovable property’ for enterprise functions. The upfront premium paid just isn’t associated to building exercise of such coated house however in opposition to the rental worth for the interval of hire calculated for the interval of lease and picked up upfront.”

Companies

Therefore, tax credit score needs to be allowed on this upfront cost of hire, it stated. Upfront lease premiums are primarily a non-refundable quantity much like a down cost paid by the tenant to the proprietor of a property. Generally, the lease premium is a part of the transaction worth, particularly in sure areas the place there’s a vendor’s market.

Generally, an quantity is agreed upon as a lease premium and GST is paid on that.

Until now, tax authorities have been principally disallowing enter tax credit score on upfront lease premium, arguing that this transaction is much like immovable property and since no enter tax credit score is allowed in any actual property deal the identical principal ought to apply to lease premiums, specialists stated.

The AAR ruling will assist open a brand new interpretation for a lot of corporations which have paid GST on such a premium they usually could attempt to avail tax credit score, tax specialists stated.

“It is a constructive ruling which has given due weightage to the character of enter service being incurred and its use in enterprise to find out the credit score eligibility,” Singh of KPMG stated.

Tax authorities have been rejecting the tax credit score on the grounds that often tenants undertake some inside renovation or small building work earlier than they use the property, specialists stated. Authorities argue that lease premium is nothing however recovering the fee, therefore making it a part of an actual property transaction, below which tax credit score just isn’t allowed.

This could be the second time when GST has are available in cross hairs with the true property sector.

Residences rented by corporations for senior executives have now began costing extra after suggestions of the GST Council got here into impact in July this 12 months.

Renting an condo by a registered entity now attracts an 18% GST as per the suggestions, as ET reported earlier. There was no GST on the lease of residential properties by people or companies, though it was relevant on business properties.