GST Jolt for Real Estate Developers: Paying tax on Rent they Never got

MUMBAI: Property developers were already battling a pronounced demand slump for rented space, resulting in either surrendered tenancy or abysmally low rents. And they now have another problem to tackle – paying goods and services taxes (GST) at 18% GST on rents either not received or paid only partially.

As per the GST framework, tax has to be paid at the time of raising invoice and not when the actual payment is made.

Many landlords have ended up paying GST on rent agreed in contracts but got lower or no rent due to Covid-19 pandemic. The question now is whether a credit note can be used in this situation and whether developers should continue paying GST on total rent or on rent that they would actually receive,” said Rohit Jain, partner at law firm ELP.

Tax experts say that there is no clarity around credit notes and whether the GST paid earlier could be set off against future tax liabilities.

“It’s a double whammy for the developer as he is not getting rent but has to pay GST on it. Once he has raised the invoice, it’s mandatory to pay to the government irrespective of the fact whether the tenant has paid to him,” said Mudassar Zaidi, executive director (north) of international property consultant Knight Frank. “In other sectors, where default used to happen, it was a common phenomenon but for commercial real estate, it’s a new thing and they will have to learn how to deal with it.According to consultants similar issues are being raised in retail and high-end markets where they pay property tax to the local authority.

On an average, the landlord pays 28% property tax to the local municipal body. Now the tenants have stopped paying while the property tax has been paid in advance. Landlords end up paying from the pocket in markets where the average rental is Rs 10 lakh per month,” said Sanjeev Mehra, president of Khan Market traders’ association, the costliest retail space of the country.

Due to this, operators of office space and retailing units are asking for an extra lock-in period.

“At places where the operator is agreeing to a discount, the condition is for an extra lock-in period since he will pay tax for the year on reduced rentals. The operators want to ensure that the tenant doesn’t leave even after reducing the rent,” said Kshitij Nagpal, a real estate consultant and president, Association of Property Professionals (APP), Delhi-NCR.

Some of the real estate companies are also worried about the year ahead as many of their tenants could still seek further discounts or surrender more space, and whether they would continue to pay 18% GST on rent agreed in contracts.