No 18% GST on Rented Residential Hostels for Students Prior to 2022: Supreme Court Grants Exemption [Read Order]

The Supreme Court has ruled that Goods and Services Tax (GST) at the rate of 18% cannot be levied on the leasing of residential premises used as hostels for students for the period prior to the 2022 amendment to the exemption notification governing such transactions.

The State of Karnataka and another authority filed appeals against Taghar Vasudeva Ambrish, a co-owner of a residential property in Bengaluru comprising 42 rooms, which had been leased to a private company, M/s DTwelve Spaces Private Limited, for the purpose of providing long-term hostel accommodation to students and working professionals.

The dispute originated when the assessee sought clarity from the Authority for Advance Ruling (AAR) regarding eligibility for exemption from GST under Entry 13 of Notification No. 9/2017–Integrated Tax (Rate) dated 28 June 2017. The AAR held that the exemption was not available as the lessee was a company and did not itself use the premises as a residence.

The AAAR affirmed this view, treating the property as akin to commercial accommodation. The assessee challenged this finding before the High Court of Karnataka, which set aside the ruling. The revenue authorities then appealed before the Supreme Court.

Represented by V. Chandrashekara Bharathi, the appellants argued that the exemption under Entry 13 was available only when the residential dwelling was used as a residence by the direct recipient of the service. They submitted that the lessee, being a commercial entity, did not itself occupy the property and instead sub-leased it for commercial gain.

The appellants further contended that, for exemption to apply, three conditions under the notification must be satisfied cumulatively:

1. there must be renting of a residential dwelling,

2. the property must qualify as a residential dwelling in nature, and

3. the dwelling must be used as a residence by the recipient of the service.

According to the appellants, these conditions were not met as the property contained 42 independent rooms with attached washrooms, making it similar to lodging or hostel-type accommodation, excluded under the Education Guide of the former service tax regime. They argued that the High Court erred in relying on the end-use of the ultimate occupants instead of focusing on the use by the lessee.

Appearing for the respondents, Arvind P. Datar argued that the exemption does not impose any requirement that the lessee must personally use the premises as a residence. He submitted that the property was a residential dwelling both by design and by approved municipal classification, and that the lessee facilitated long-term residential use by students and working professionals, fully meeting the conditions of the exemption.

The respondents highlighted that taxing the transaction at 18% GST would ultimately burden students and working women, defeating the legislative intent of exempting residential use. They also pointed out that from 18.07.2022, the exemption was removed only through an express amendment, demonstrating that the earlier position allowed exemption even when rented to registered entities.

The Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan dismissed the appeals filed by the State of Karnataka. The Court held that the property constituted a “residential dwelling” in common parlance and as understood in the earlier service tax framework.

The Bench reasoned that Entry 13 of Notification No. 9/2017 provided an activity-based exemption for renting residential dwellings for use as a residence, without requiring that the lessee must personally occupy the premises. The Court ruled that the exemption applies so long as the ultimate use is residential, and sub-leasing to students and working professionals for long-term accommodation satisfies this criterion.

The Apex Court observed that adopting the narrow interpretation urged by the revenue would defeat the purpose of the exemption and noted that any change to this framework came only through the 2022 amendment, which could not be applied retrospectively.

Accordingly, the High Court’s decision was affirmed, and the assessee remained entitled to exemption from 18% GST for the period prior to 18.07.2022.

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