GST Exemption on Residential Lease Available Even When Lessee Sub-Leases the Property for Hostel Use: Supreme Court

The Supreme Court held that sub-leasing residential properties as hostels for students and professionals qualifies for GST exemption under Entry 13 of the Notification No. 9/2017- Integrated Tax (Rate) dated 28.06.2017.

The respondent, Taghar Vasudeva Ambrish, is a co-owner of a residential property in Bangalore having 42 rooms. The respondent leased this property to M/s DTwelve Spaces Private Limited, the lessee. The lessee further sub-leased this residential property as a hostel to give long-term accommodation ranging from 3 months to 12 months to students and working professionals.

The respondent sought an advance ruling before the AAR to seek clarification on whether he is eligible to claim GST exemption on rent received by him from the lessee. The AAR denied this, holding that the services of renting residential dwellings do not fall under Entry 13 of the Exemption Notification and that the lessee company did not use it as a residence. The AAAR also upheld this decision, saying that the property rented by Ambrish cannot be treated as a rented accommodation, and the GST exemption under the said notification can only be availed if the lessee company uses the residential dwelling as a residence. Therefore, Ambrish approached the Karnataka High Court.

The Karnataka High Court ruled in his favour, holding that the hostels used for residential purposes by the students and working women qualify as residential dwellings, and there is no such condition in the Notification that says that the lessee company has to use the property as a residence for the lessor to claim GST exemption. This order was challenged by the State of Karnataka in the Supreme Court.

The main issue before the Supreme Court was whether the GST of 18% is applicable to the rent received by the lessee from the lessor. The court clarified the meaning of ‘residential dwelling‘, saying that the residential dwelling means any building, structure or part of the building other than the offices or factories that is used as a home or residence. The Apex Court held that any residential accommodation that is meant for long-term stay qualifies as a residential dwelling, which means the subject property was also a residential dwelling.

Further, the Supreme Court said that if the GST of 18% is levied on the said transaction, this would pass on to the students and working professionals, which would defeat the intent to grant GST exemption for residential use. The court further observed that the exemption under Entry 13 is an activity-specific exemption and not a person-specific exemption.

“In addition to above, it is pertinent to note that exemption envisaged under Entry 13 is an activity specific exemption and not person specific exemption. There are many exemptions given under GST law which are person specific exemptions and are applicable only when service provider or recipient is among the notified category of persons. On the other hand, there are many exemptions which are activity specific exemptions whereby an activity is given an exemption, and such exemptions are not dependent on the person using the service that is exempt,” the court said.

Therefore, the bench led by JB Pardiwala and KV Viswanathan upheld the Karnataka High Court’s order and rejected the appeal filed by the State, holding that the GST exemption is available even if the lessee further leases the residential property.