GST Applicability on Electricity Charges for Tenants Clarified
The Central Board of Indirect Taxes and Customs (CBIC) issued a circular on Tuesday to clarify the application of Goods and Services Tax (GST) on electricity charge reimbursements collected by airport operators, mall operators, and real estate firms from their tenants or lessees. This clarification impacts how GST applies to electricity charges within commercial leases.
GST Implications for Tenants and Landlords
The government clarified that tenants, particularly those leasing commercial properties, are liable for 18% GST on electricity charges when supplied alongside immovable property rental and facility maintenance. This applies specifically when electricity is provided as a composite supply with the rental of the property. Conversely, when landlords or mall operators act as distribution agents and bill electricity based on actual costs, no GST will be levied.
The CBIC circular emphasizes that the primary supply is the leasing of the property and its maintenance; the provision of electricity is considered incidental. Therefore, the applicable GST rate is that of the rental and maintenance, irrespective of whether electricity billing is separate. Importantly, the circular explicitly excludes homeowners in housing societies from this GST provision. Resident Welfare Associations (RWAs), property owners, and developers functioning as pure agents for electricity supply and charging on an actual cost basis (mirroring charges from State Electricity Boards or DISCOMs) are also exempt.
Expert Analysis and Potential Impact
Industry experts have offered diverging views on the ramifications of this clarification. Saurabh Agarwal, a partner at EY, voiced concerns within the real estate sector. While acknowledging some exceptions, such as actual cost recovery or pure agency, he highlighted concern regarding the blanket application of GST to electricity charges. Agarwal specifically pointed to the scenario where real estate entities convert high-tension lines to low-tension lines, charging higher rates to compensate for transmission losses. He predicted that landlords might incorporate the GST cost associated with electricity into their lease rental calculations, potentially pushing rental costs higher.
"The real estate industry is concerned about the CBIC’s most recent clarification. This clarification applies GST to electricity charges, regardless of whether they are provided separately or in conjunction with real estate. Although there are some exceptions, such as when property owners recover electricity costs on an actual basis or act as pure agents," according to Saurabh Agarwal, a partner at the consulting firm EY.
In his view, “The implications of this clarification remain a concern in cases where real estate companies convert high tension lines to low tension lines and charge higher rates due to transmission loss.” “Going forward, landlords may factor in the GST cost on electricity when determining lease rental amounts, which could increase the rental cost,” he continued.
In contrast, MS Mani, a partner at Deloitte India, offered a more positive perspective. He argued that the clarification offers greater business certainty and promotes uniformity in the real estate sector's practices. He emphasized its benefit for recipients of composite supplies who had uncertainty regarding eligibility for input tax credits (ITC).
“This will help the recipients of such composite supplies who were uncertain about their eligibility for input tax credits (ITC), in addition to ensuring uniformity of procedures throughout the real estate industry,” he said regarding the clarification on electricity charges recovered as part of a composite supply.