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In relief to tenants, AAR allows tax credit on GST paid on upfront lease premium
September, 21st 2022

An Authority for Advance Ruling (AAR) judgement saying tax credit should be allowed on goods and services tax (GST) paid on upfront lease premium could give a breather to companies and even corporate individuals. Tax authorities have been disallowing the tax credit up until now. The AAR ruling means that many tenants would now be able to challenge the taxman's stance, experts said.

"Generally, tax authorities are disallowing input credit on upfront lease premium on the ground that same is in relation to immovable property, hence restricted, or where tenants undertake some renovation or construction work before they use the property, the credit is denied on the logic of input service of lease being used for construction," said Harpreet Singh, partner at KPMG India.

Input tax credit is a mechanism under GST where part of the tax paid can be set off against future tax liability. Tamil Nadu AAR in a ruling on July 27 had said, "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 purposes. The upfront premium paid is not related to construction activity of such covered space but against the rental value fo ..

Hence, tax credit should be allowed on this upfront payment of rent, it said. Upfront lease premiums are essentially a non-refundable amount similar to a down payment paid by the tenant to the owner of a property. In most cases, the lease premium is part of the transaction value, especially in certain areas where there is a seller's market.

In most cases, an amount is agreed upon as a lease premium and GST is paid on that.

Till now, tax authorities have been mostly disallowing input tax credit on upfront lease premium, arguing that this transaction is similar to immovable property and since no input tax credit is allowed in any real estate deal the same principal should apply to lease premiums, experts said.

The AAR ruling will help open a new interpretation for many companies that have paid GST on such a premium and they may try to avail tax credit, tax experts said.

"This is a positive ruling which has given due weightage to the nature of input service being incurred and its use in business to determine the credit eligibility," Singh of KPMG said.

Tax authorities have been rejecting the tax credit on the grounds that usually tenants undertake some interior renovation or small construction work before they use the property, experts said. Authorities argue that lease premium is nothing but recovering the cost, hence making it part of a real estate transaction, under which tax credit is not allowed.

This would be the second time when GST has come in cross hairs with the real estate sector.

Apartments rented by companies for senior executives have now started costing more after recommendations of the GST Council came into effect in July this year.

Renting an apartment by a registered entity now attracts an 18% GST as per the recommendations, as ET reported earlier. There was no GST on the lease of residential properties by individuals or corporations, although it was applicable on commercial properties.

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