The government has taken the stand that transfer of commercial tenancy rights is a service liable to tax. Subjecting commercial tenancy rights to tax is bound to affect the overall commercial rental space and businesses.
A finance ministry circular has said such activity against consideration in the form of tenancy premium constitutes a “supply of service”, which is liable to Goods and Services Tax (GST) “Merely because a transaction or a supply involves execution of documents which may require registration and payment of registration fee and stamp duty, would not preclude them from the scope of supply of goods and services and from payment of GST,” it said.
The circular has also reaffirmed that no tax would, however, be imposed on residential renting. It said grant of tenancy rights in a residential dwelling meant for use as residence against tenancy premium or period rent or both, is exempt.
“The activity of transfer of ‘tenancy rights’ is squarely covered under the scope of supply and taxable per-se,” it said. Services provided by outgoing tenant by way of surrender of tenancy rights against consideration, in form of a portion of tenancy premium, is also liable to GST, it has said.
The transfer of tenancy rights against tenancy premium, also known as pagadi, is prevalent in states such as Mahrashtra. Under this system, the tenant gets tenancy rights in the property by paying the tenancy premium. The landlord may be owner of the property but the possession of the same lies with the tenant. The tenant pays rent to the landlord regularly as long as they occupy the property. The tenant also usually has the choice to sell the tenancy right of the said property, but in such a case they have to share a percentage of the proceeds with the owner, as laid down in their tenancy agreement. Alternatively, the landlord pays to tenant the prevailing tenancy premium to get the property vacated.
“The activity of transfer of tenancy right against consideration in the form of tenancy premium is a supply of service liable to GST,” it said.
“It is a form of lease or renting of property and such activity is specifically declared to be a service in Para 2 of Schedule II i.e. any lease, tenancy, easement, licence to occupy land is a supply of services,” it added.