GST ON HOSTELS
In the case of Srisai Luxurious Stay LLP [Ruling No. KAR ADRG 25/2023 dated JULY 13, 2023], the Authority for Advance Rulings (AAR), Karnataka, addressed certain issues concerning the taxability of hostel and PG accommodation services under the Goods and Services Tax (GST) regime. The AAR ruled that such services cannot be considered equivalent to residential accommodation and are, therefore, not eligible for exemption. Accordingly, these services are liable to GST at the rate of 12%.
Facts:
M/s. Srisai Luxurious Stay LLP ("the Applicant") operated paying guest accommodation, service apartments, and flats, providing various additional services to the paying guests, such as meals, furnished rooms, security, housekeeping, washing machine facilities, television in each room, internet access, and vehicle parking.
The Applicant argued that private hostels are covered under the category of residential dwellings and should be eligible for exemption under Entry No. 12 of Notification No. 12/2017 Central Tax (Rate) dated June 28, 2017 ("the Service Exemption Notification"). This entry exempts "services by way of renting of residential dwelling for use as a residence except where the residential dwelling is rented to a registered person."
Issues:
The AAR addressed the following issues:
Whether PG/Hostel used as residential dwelling by inhabitants qualify for GST exemption?
Whether charges towards allied services would be considered as ancillary services of the hostel/paying services?
Whether GST on reverse charge will be applicable on the rental to be paid to the landowners?
Ruling:
The AAR, Karnataka, ruled as follows:
Exemption of services: The AAR noted that the term "residential dwelling" is not specifically defined in the service exemption notification or the Central Goods and Services Tax Act, 2017, and its related rules. However, based on the interpretation of the term in the education guide on taxation services, a "residential dwelling" refers to residential accommodation intended for permanent stay, excluding guest houses or lodges meant for temporary stay. The AAR held that the accommodation services provided by the Applicant are akin to guest house and lodging services, and therefore, do not qualify as "residential dwellings" eligible for exemption under Sl. No. 12 of the service exemption notification.
Additional services: The AAR observed that services like meals and other facilities offered by the Applicant are optional and not integral to the main accommodation service. Therefore, the Applicant is liable to pay GST on such additional services.
GST under Reverse Charge Mechanism (RCM): The AAR noted the insertion of a new entry 5AA in the principal notification no. 13/2017- Central Tax (Rate) dated June 28, 2017, through notification no. 05/2022- Central Tax (Rate) dated July 18, 2022. This new entry states that a registered recipient would be liable to pay GST under RCM for "service by way of renting of residential dwelling to a registered person." Therefore, the Applicant, being a registered person, is liable to pay GST under RCM on the rental payments made to the landlord of the residential property.
Comments:
This ruling by the AAR, Karnataka, is similar to the ruling passed by the AAR, Uttar Pradesh, in the case of M/s V S Institute & Hostel Private Limited [AR No. UP ADRG -26/2023 dated May 08, 2023]. It is important to note that these rulings are binding only on the Applicants and the authorities issuing the rulings. However, the taxation of hostels/PG accommodations may have significant implications for the hostel industry, especially in education hubs like Kota, Rajasthan. Taxing such services could increase costs for students and pose challenges for accommodation providers in maintaining margins and occupancy levels.