In a significant ruling the Gujarat Authority for Advance Ruling for Goods and Services Tax (GST) has said a landlord does not have to pay GST on electricity or incidental charges recovered from tenants, in addition to rent as per lease agreement for renting of immovable property since the said amount would not be includible in the value of supply.
The ruling came after Gujarat Narmada Valley Fertilizers & Chemicals Ltd approached the Gujarat AAR on whether electricity charges paid by landlord to electricity supply company for electricity connection in the name of landlord and recovered based on sub meters from different tenants should be considered as amount recovered as pure agent of the tenant.
GST has a concept of “pure agent”, under which if you incur an expense while providing a service to your customer, then on satisfaction of all prescribed conditions, you need not pay any GST on the amount you recover over and above your charges in the capacity of pure agent.
For example, if a property dealer charges you fees for suggesting a property to you, but also charges some additional money for doing the legal work of paying statutory charges. In this case, if the property dealer qualifies as your pure agent when paying legal fees, then GST would be applicable on only his fees (commission for finding the property) and not on the legal fees that he incurred on your behalf as a pure agent.
In its ruling Gujarat AAR held that, “The applicant has cast an onus on the lessee to pay the charges in respect of the electric power used by them directly to the electricity company-it cannot be said that the electricity charges would be covered by Sec. 15(2)(c) of the CGST Act, 2017 for the sole reason that the rate for renting of premises has been fixed at an amount and the electricity charges are to be borne by the lessee as per the actual usage of electric power by them in terms of the agreement.”
The AAR went on to state that while computing GST, electricity would not be included in the value of rent only when the rent agreement clearly states that the tenant would bear the electricity charges on actuals and rent is only the agreed fixed amount for staying in the property
Accordingly, the said amount would not be includible in the value of supply – the decision would apply to specific agreement wherein the clauses of the agreement are specific to the effect that the lessee would bear the electricity expenses at actuals and the value of renting of the immovable property is a fixed amount which becomes the value of supply in terms of the statutory provisions
Gujarat AAR also found the applicant qualifies as a pure agent. “The electricity charges collected by the landlord from the tenant at actuals based on the reading of the sub-meters is covered under the amount recovered as a pure agent in terms of the provisions of Rule 33 of the CGST Rules, 2017 in respect of the lessor – the decision would apply only in respect of the agreement under discussion and analogy of this decision would not be applicable to different set of circumstances.”
According to Harpreet Singh, Partner, Indirect Taxes, KPMG India, while the ruling authority has held that the decision is applicable only in respect of the agreement in consideration, this ruling would still have wide ramifications, as generally the arrangement is similar where the landlord recovers fixed rent and electricity is recovered on actual. “Hopefully, this ruling would be sagacious enough to attract the eyes of taxpayers and the authorities, as the reasoning provided for non-applicability of GST on electricity appears to be cogent.” adds Singh.