GST: Notional Interest on Security Deposit, Property Tax forms part of ‘Rental Income’, if it influences the Value of Supply, rules AAR [Read Order]

GST - Notional Interest - security deposit - property tax - AAR - Taxscan

The Karnataka Authority for Advance Ruling (AAR) has adjudged that no deduction towards property taxes is allowed from the value of renting of immovable services (RIS). Further notional amount of interest on security deposit would be included in value, only if it influences the monthly rent.

The Applicant M/s Midcon Polymers Pvt Ltd, have proposed or planned to engage in the business of renting of commercial property on monthly rents and allied business. They intend to enter into a contractual agreement of renting of immovable property with an Educational Institution in Bangalore.

The contract is on the basis of reserved monthly rent of Rs 1.50 lakhs or annual rent of Rs.18 lakhs and also refundable caution deposit of Rs.500 lakhs, which shall be returned without interest on the termination of tenancy.

The Applicant discharges the statutory taxes levied by the BBMP and also deposits, which is as per contract.

The applicants do not have any taxable activity other than the activity of leasing out immovable property spaces hence are at present claiming exemption since their turnover is less than Rs.20 lakhs.

The applicant sought the advance ruling on issues whether there can be a deduction of property taxes and other statutory dues and whether notional interest on the security deposit should be taken into consideration for the purpose of arriving at the value of rental income.

Another question was whether the applicant is entitled for exemption of tax under the general exemption of Rs.20 lakh.

The two-member bench of Dr. Ravi Prasad M.P. and Mashood ur Rehman Farooqui ruled that the security deposit is an interest-free refundable deposit which shall be returned to the lessee on lease termination. Accordingly, it held that it will not be considered as a supply of renting of immovable property service.

However, AAR mentioned that if at the expiry of the lease tenure, the entire deposit or part of it is withheld and not paid back, then at that stage such amounts not refunded will be liable to GST.

Inferring that notional interest that the applicant earns is in respect of the supply of rental service though is not by recipient of service but from another person, AAR held, “notional interest has to be considered as part of the value of supply of service, if and only if the said notional interest influences the value of supply” and is leviable to GST along with the monthly rent at the rate applicable thereto.”

It also held that that applicant is entitled to a general exemption of Rs.20 lakh for registration purposes subject to the condition that their annual total turnover which includes monthly rent and Notional interest, if it influences the value of supply, does not exceed the threshold limit.

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