Commercial Lease under Goods and Service Tax
Commercial lease under Goods and Service Tax
Implementation of Goods and Services Tax in India will significantly impact the taxation of commercial lease. Presently, the tax structure in India is origin based. But with the implementation of GST, there will be shift from origin based taxation to destination based taxation.
What is Destination Based Taxation?
As the name suggests, Destination Based Taxation is the taxation based on destination or consumption of the goods or services. This principle follows a simple theory that the goods or services should be taxed at the stage where their consumption takes place rather than the point where their origin takes place i.e. production.The entire revenue relating to the goods or services should accrue in the jurisdiction where they are being ultimately consumed.
For Example, If A in Gujarat produces the goods and sells the goods to B in Delhi, then in such case the tax should be levied and collected in the State of Delhi and not in the State of Gujarat. The revenue in the case of destination based taxation belongs to the place, where the goods are finally consumed and not to the State where the goods are produced.
Taxation of Commercial Leasing
Commercial leasing will fall under the ambit of GST as it is under service tax.
Broadly speaking, there are two types of Leases:
- Operating Lease: Operating lease is a contract wherein the owner, called the lessor, permits the user, called the Lessee, to use of an asset for a particular period which is shorter than the economic life of the asset without any transfer of ownership rights. In this lease, all risks and rewards related to asset ownership remain with the lessor and the asset is returned by the lessee after using it for lease term agreed upon.
- Financial Lease: In financial lease (Also known as capital lease), the risks and rewards related to ownership of asset leased are transferred to the lessee. Financial lease is treated generally like a loan and the asset ownership is considered of the lessee. Lease term is generally more than or equal to the estimated economic life of the asset leased.
Things to Remember
Presently, finance lease transactions are liable to both, VAT and Service Tax, and ordinarily operating lease transactions attract VAT. Under the Model GST Law, a finance lease would be considered as supply of goods, and an operating lease would be considered as a service.
The schedule II of Model GST law defines some matters to be treated as supply of services which includes:
- Any lease, tenancy, easement, licence to occupy land is a supply of service
- Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.
Thus any person leasing commercial premises is liable to be charged GST. He is also liable to get himself registered under GST if the turnover of the activities exceeds the GST registration turnover threshold.
Taxation of Import of Assets on Lease
Presently, VAT is not payable on import of assets on lease basis. But under GST regime, leasing of an asset from outside India, will be liable to IGST because GST is a Destination based consumption tax and the ultimate use of goods in case of Imports is within India.
Long Term Lease and Residential Leasing
Both long term and short term leases will be covered under GST as it was covered under Service tax. Presently, long term leases suffers from both Stamp duty and service tax. Also the credit of input tax paid on raw material purchased for the construction of the premises is not available leading to double taxation. As of now, it is not clear how GST will be levied on commercial leases, but it is hoped that the credit of GST paid on goods and services used in maintenance of commercial property.
Since stamp duty is not subsumed in GST, stamp duty will be payable on such transactions.But since the transaction of sale of immovable property is not covered under the definition of supply of services thus will not fall under the ambit of GST.
Residential leasing is a negative listed item under current service tax and this situation is likely to remain same under GST regime.
