Modality of GST on Hostel Rent settled by Madras High Court?

The rapid urbanization and change in the landscape of employment and education have led to the growth of residential accommodation services in the form of Hostels and Paying Guest accommodation (PGs) in major cities. With the object of one nation-one tax, GST has been spreading its wings to cover each and every sector (except health care services wherein tax is levied on bed charges exceeding a certain limit). In such a scenario, everyone has been circumspect about the taxability of rent/ lease paid for Hostel/ PG accommodation.

While the government prudently provided an exemption for services by way of renting of residential dwelling for use as residence falling under heading 9963 or heading 9972 by virtue of Entry 12 in Notification No. 12/2017-Central Tax (rate) dated June 28, 2017, when the scope of the said entry was enquired into by assessees before multiple Advance Ruling Authorities (‘AAR’) across the country, there were unanimous replies that accommodation services provided by hostels cannot be classified as renting of a residential dwelling and that GST exemption cannot be claimed for the same.

However, the grounds on which this exemption was denied were varied:

• residential dwelling is understood as a building or part of a building let out for use by a person or family and is a part of a house with kitchen, bedroom and living room;

• residential dwelling does not include amenities like food, housekeeping, etc;

• hostels provide temporary lodging and inhabitants do not have responsibility for maintenance;

• Hostel accommodation is akin to guest house and lodging services;

• unrelated people share the rooms and invoices are raised per bed on monthly basis;

• hostel accommodation is provided with an intention to provide a sociable accommodation; therefore the same does not have characteristics of a residential dwelling.

A similar fate before the Advance Ruling Authority in re Thai Mookambika Ladies Hostel:

Thai Mookambikaa Ladies Hostel (hereinafter referred to as ‘assessee’) was engaged in running a ladies hostel by providing accommodation and food to the college students and working women on a monthly basis. The monthly tariff per person ranged between ₹ 1200/- to 6,500/- per month. The assessee provided single-room, double-room sharing, or dormitory-style accommodation and the rates varied accordingly.

The assessee, with an understanding that they were eligible for exemption under Notification dated June 28, 2017, filed an application before the AAR and sought a ruling. In the event of an affirmative answer, the assessee also sought a ruling on whether the supply of in-house food to inhabitants of the hostel would be exempt from GST, being in the nature of composite supply.

The AAR in its ruling held that since the assessee is letting out a single room to various inhabitants for various time periods for a pecuniary benefit, the service of providing hostel accommodation by the assessee was not eligible for exemption under Entry 12 of the exemption notification and that such services were taxable at 18 per cent, akin to hotels. Further, with respect to the supply of in-house food to the occupants of the hostel, it was held that the same amounts to composite supply, with the principal supply being hostel accommodation services, and is subject to GST at 18 per cent.

Decision of the Hon’ble Madras High Court: 

The assessee being aggrieved by the decision of the AAR, filed a writ petition before the Hon’ble High Court of Madras contending that the hostel services provided by the assessee would fall under Entry 12 of the Notification No. 12/2017 and is covered by the decision of the division bench of the High Court of Karnataka in Taghar Vasudeva Ambrish vs Appellate Authority for Advance Ruling, Karnataka and others, wherein, it was observed that ‘residence’ and ‘dwelling’ have more or less the similar connotation and therefore the same meaning has to be assigned to ‘residential dwelling’ which includes hostel that is used for residential purposes by students and working women.

Settling the dust (and providing a huge sigh of relief for various stakeholders):

The Hon’ble High Court held that the word ‘residential dwelling’ referred to in Entry 12 of the exemption Notification No. 12/2017 would include hostel facilities provided by the assessee to working women, students and professions, etc. It was specifically observed that:

• The Central Government by way of the Notification No. 12/2017-CT (rate) provided an unconditional exemption to renting of residential dwelling to any person when it is used for residence. It was therefore clear that the exemption was based on the purpose of kind of dwelling and the purpose of renting.

• GST was only payable in cases where such residential dwelling is rented out for commercial purposes.

• The Central Government vide Notification No. 04/2022-Central Tax (rate) dated July 13, 2022, amended Notification No. 12/2017-CT (rate) wherein after the words ‘as residence’, the words ‘except where the residential dwelling is rented to the registered person’ has been added, which clarifies that services provided by way of renting of a residential dwelling for residential purpose are covered under the exemption.

• In order to determine the meaning of the word ‘residential dwelling unit’, the Court relied on several judgments. The Court further relied on the dictionary meaning of the words ‘residence’ and ‘dwelling’ to determine their meaning in common parlance and in the popular sense. In common parlance, ‘residential dwelling’ means ‘building, structure, or part of the building or structure other than offices or factories, that is used or intended to be used as a home, residence, or sleeping place by one person or by two or more persons maintaining a common household, to the exclusion of all others.' 

The High Court also considered the objective of Entry 12 and held that:

• Every person must have residential dwelling to live and the same varies upon the lifestyle and status of each person and merely because a person stays in hostel room due to a certain financial condition, it does not take away the status of the hostel room as residential dwelling, since inhabitants have been staying, sleeping, eating, washing, etc. in the hostel rooms.

• The authorities have to look into whether the particular place is a dwelling unit or not and since the hostellers stay in a room, it constitutes a residential dwelling.

The Court thereafter concluded as under:

• The exemption is provided to any person who is engaged in renting of residential dwelling used as residence. The benefit of the exemption notification would be available when the landlord rents out the premises to corporates who in turn rent them out to students or working women. This exemption is available when the premises are rented out as a residence to students by corporate PG/ commercial establishments.

• The imposition of GST on hostel accommodation should be viewed from the perspective of recipient of service and not from the perspective of service provider, who offers the premises on rental basis.

• In order to claim exemption from GST, the nature of end-use must be ‘residential’ and this is based on the purpose for which it is used and not the nature of property or the business of the service provider. 

The High Court by and large, relied upon the judgment in the Taghar Vasudeva Ambrish case (supra), which held that the services provided by leasing residential premises as a hostel to students and working professionals are exempted in Entry 13 of Notification No. 9/2017 which is a parallel notification issued under Integrated Goods and Services Tax Act, 2017. However, the judgment in the Taghar Vasudeva case did not specifically provide a finding on food supplied to inhabitants.

In our view, the food supplied by any person to its dwellers forms part of the composite supply with the principal supply being the service of providing residential dwelling. Since the principal supply is exempt from tax, the ancillary supply of food to inhabitants is also exempt from payment of tax by virtue of Section 8 of the CGST Act.

Conclusion

The exemption provided under Notification No. 12/2017 extends to services provided by  renting of any residential premises for residential purposes. The eligibility of the exemption would depend on the purpose of renting and the end use of the premises rather than the intention/ profit motive of the supplier of such services. 

While the conundrum seems to be settled by this decision of the High Court, the tendency to make amendments to overcome the judgement passed in Taghar Vasudeva case (supra), has to be kept in mind. It would be necessary to tread carefully and observe whether there could be potential amendments to the exemption to overcome the present judgment or an overturn by the Supreme Court on appeal by the department.

About the authors: Rishab J is an Associate Partner and Dhanyatha R is an Associate at Shivadass & Shivadass.