In what has implications for commercial rental space and businesses in general, the government has said transfer of tenancy rights is a service liable to tax. A finance ministry circular has said such activity against consideration in the form of tenancy premium constitutes a “supply of service”, which is liable to Goods and Services Tax (GST) “Merely because a transaction or a supply involves execution of documents which may require registration and payment of registration fee and stamp duty, would not preclude them from the scope of supply of goods and services and from payment of GST,” it said. 

The circular has reaffirmed that residential renting is exempted from tax. It said grant of tenancy rights in a residential dwelling for use as residence against tenancy premium or period rent or both, is exempt. 

“The activity of transfer of ‘tenancy rights’ is squarely covered under the scope of supply and taxable per-se,” it said. Services provided by outgoing tenant by way of surrendering tenancy rights against consideration in form of a portion of tenancy premium is also liable to GST, it has said. 

The transfer of tenancy rights against tenancy premium, also known as pagadi, is prevalent in states such as Mahrashtra. Under this system, the tenant acquires tenancy rights in the property against payment of tenancy premium. 

The landlord may be owner of the property but the possession of the same lies with the tenant. The tenant pays periodic rent to the landlord as long as he occupies the property. The tenant also usually has the option to sell the tenancy right of the said property and in such a case has to share a percentage of the proceed with the owner, as laid down in their tenancy agreement. Alternatively, the landlord pays to tenant the prevailing tenancy premium to get the property vacated. 

“The activity of transfer of tenancy right against consideration in the form of tenancy premium is a supply of service liable to GST,” it said. #casansaar (Source - CBIC, Economic Times)

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