In a recent development, the Central Board of Indirect Taxes and Customs (CBIC) has issued a comprehensive circular addressing the application of Goods and Services Tax (GST) on electricity charges incurred by real estate enterprises, shopping malls, and airport operators from their lessees or tenants. This ruling pertains primarily to tenants of commercial properties.
The crux of the matter is that tenants will now be obliged to bear an 18% GST burden on electricity charges when such charges are integrated with the leasing of immovable property and the upkeep of premises. However, when the electricity is billed separately by real estate owners or mall operators, effectively acting as intermediaries for electricity distribution companies (DISCOMs), it will not attract any GST.
The CBIC has underscored that when electricity is supplied in conjunction with the lease of immovable property and maintenance of premises, it constitutes a composite supply and shall be subject to taxation accordingly. The principal supply in such cases remains the leasing of immovable property and maintenance of premises, with electricity supply considered ancillary. Even if electricity is itemized on the bill separately, the entire supply continues to be regarded as composite, thereby subject to the GST rate applicable to the principal supply, which is the GST rate for the lease of immovable property and premises maintenance.
Furthermore, it has been clarified that residents residing in housing societies will be exempt from GST. In instances where electricity is provided by real estate owners, resident welfare associations (RWAs), or real estate developers acting as pure agents, the cost of electricity will not be factored into the value of their supply. In cases where they charge for electricity on an actual basis, matching the charges by the State Electricity Boards or DISCOMs, they will be considered pure agents for this supply.
Experts in the field hold differing perspectives on this clarification. Saurabh Agarwal, a partner at the consultancy firm EY, has expressed concerns regarding the impact of this clarification on the real estate sector. He asserts that while the clarification does allow exceptions when real estate owners act as pure agents or bill electricity charges based on actual consumption, certain aspects remain contentious. For instance, situations where real estate companies convert high tension lines to low tension lines and charge higher rates due to transmission loss present concerns. Consequently, it is conceivable that this clarification may result in an increase in rental costs, as landlords may factor in the GST component on electricity when determining lease rental amounts.
On the other hand, MS Mani, a partner at Deloitte India, has perceived the clarification as advantageous for business individuals. He maintains that the clarity provided regarding electricity charges within composite supplies not only standardizes practices across the real estate sector but also proves beneficial for recipients of such composite supplies, who have previously faced uncertainties regarding their eligibility for input tax credits (ITC).
This development underscores the evolving landscape of GST regulations and their implications on various industries. As businesses and individuals navigate these changes, it becomes essential to understand and adapt to the latest regulatory updates.