GST: Credit Relief For Leasing Of Immovable Property Will Lower Operational Costs

Allowing credit on Goods and Services Tax paid on upfront payment of rent would help lower litigation and overall operational cost of companies, experts said while opining on a recent order by the Tamil Nadu Authority for Advance Ruling. The AAR allowed allowed input credit tax on GST paid by Kamarajar Port Ltd. on advance rent paid to Chennai Port Trusts.

"The upfront premium made is the lease rentals as per the allotment order/letter of Chennai Port Trusts and it is nothing, but lease rentals paid for the services of 'Renting of Immovable property' for business purpose," the Tamil Nadu AAR said in the ruling.

So far, various AARs and AAARs have previously held that input tax credit is not available on GST paid on lease premiums but those were cases where there was an element of construction was involved, Saurabh Agarwal, partner at EY India, explained.

The facts in this case before the Tamil Nadu AAR didn't involve construction on the leased land.

Kamarajar Port had entered into a lease agreement with Chennai Port Trust for allotment of a closed space—construction building—to be used as corporate office for business purpose for thirty years.

Kamarajar, after having paid the upfront lease premium for thirty years including 18% GST, sought tax credit on the lease paid.

This was rejected by the state jurisdictional authority leading Kamarajar to approach the advance ruling before the Chennai North Commissionerate State. It stated that the contract is a simple lease contract of building and does not construe to any construction activity and hence tax credit should not be blocked.

The AAR agreed with this reasoning.

It pointed out that the upfront premium paid is not related to any construction activity of such covered space but against the rental value for the period of rent calculated for the period of lease and collected upfront.

And so, input tax credit should be allowed on this upfront payment of rent, it said.

Input tax credit is a mechanism under GST where the portion of the tax paid can be set off against future tax liability.

If there is a lease of immovable property akin to the transaction in the instant ruling, entities have been taking credits, says Prashant Agarwal, tax partner at PwC India. The challenge, he adds, lies for developers who construct such properties for further lease.

Leasing of immovable property is different from services in relation to construction of immovable property. As such there should not be any challenge in taking credits, he said.