GST @ 18% on commercial rent: Reasons why builders are likely to shift to residential construction

The government has set the record straight through a neat binary equation—no goods and services tax (GST) on rent from residential properties irrespective of its size. However, GST at the rate of 18 percent would have to be paid on commercial rent in excess of Rs 20 lakh per financial year, period. While this is the logical culmination of any comprehensive value added tax system that doesn’t discriminate between goods and services, the following positive and negative fallouts need to be highlighted and brought to the fore. First the positives. 1) Value addition would be truly and comprehensively captured.  After all, rent is an important component of cost for many business establishments. The nation’s GDP would also be projected in true light; 2) Government’s revenue is going to increase on this score because of the audit trail left by the GST system. In other words, landlords cannot evade the GST unless they resort to one or more of the subterfuges highlighted herein in the subsequent paragraphs. [caption id=“attachment_3213962” align=“alignleft” width=“380”]  Reuters[/caption] 3) Business houses would see wisdom in owning their business premises to the extent possible because in the wake of GST on commercial rent, rents are likely to skyrocket given the tendency to pass on any tax burden to the beneficiary; and 4) Builders would see wisdom in constructing more and more residential properties because commercial properties by and large would become an in-house affair. This is the upshot of the previous point. Let us turn to the negatives, rather the likely maneuvers to wriggle out of the tax a) There would be a lot of commercial properties masquerading as residential. This is not something new. Already cities are witnessing this tendency to break free of the municipal restrictions and higher property taxes on commercial properties. In short, commercial rent would go underground, as it were. Result would be return of the inspector raj with a bang; b) There would be accent on ownership of smaller commercial properties under different banners by the same landlords. For example, a builder now functioning under one banner might float ten companies so that each company does not get annual rent in excess of Rs 20 lakh. This is the typical splitting and splintering problem that has been vexing the income tax department; c) Professionals would no longer expose themselves to scrutiny by functioning from luxurious and swanky commercial complexes. Rather they might choose to function from the comfort of their more modest office-cum-residences. The exemption from registration with GSTN and exemption from GST itself would be generally a big gravitas for smallness.  Indeed small would become beautiful under the new GST milieu. Lots of businesses are likely to shrink (through clever planning) in size to a turnover of less than Rs 20 lakh. If this is not possible for some reason or the other, the endeavor would be to at least restrict turnover to Rs 75 lakh so that one can get off with just a slap on the wrist—1 percent GST under the compounding scheme reserved for those with a turnover of not more than Rs 75 lakh per financial year.  Such maneuvers are eminently possible with greater ease in case of services of which renting activity is a subset. The commercial landlords, so to speak, of course need some sympathy. It is cruel to badger them with a GST of 18 percent and then with an income tax which is not likely to be less than 18 percent depending upon the rate applicable.  36 percent tax can kill any industry.  Of course this is not unique to landlords given the fact companies by and large would be paying GST as well as corporate tax of 25 percent.  But wherever there is a choice, there is bound to be a shift—there is likely to be a shift from commercial construction to residential construction.