If the cost of energy is included in the rent or maintenance, would you also be required to pay GST?

 If the cost of energy is included in the rent or maintenance, would you also be required to pay GST?

According to several analysts, there hasn't been a significant shift in the GST landscape after the CBIC explanation. However, if energy is being paid on a cost-to-cost basis (with sufficient explanation) in situations involving the rental of commercial premises, a decision may be made to not impose GST on such an amount.

CBIC has explained that, even in the event that electricity is invoiced separately, the supplies will still be considered a composite supply. Consequently, the rate of the major supply—that is, the GST rate on the rental of immovable property and, if applicable, the upkeep of the premises—would apply.

When electricity bills are combined with other costs like rent or maintenance by real estate companies, shopping centers, or airports, they are considered a composite supply and are subject to an 18% goods and services tax (GST). However, the supply of energy by real estate developers or residents' welfare groups, when the price is set according to actuals or by state electricity boards or distribution corporations (discoms), would not be subject to GST as a composite supply.

The Central Board of Indirect Taxes and Customs (CBIC) has provided clarification on this. It is made clear that when electricity is provided in conjunction with the upkeep of a property or the rental of real estate, as the situation may be, it is considered a composite supply and will be taxed as such. According to the CBIC, the primary supply is the rental of real estate and, if applicable, the upkeep of the premises; the delivery of energy is an accessory supply.

It has been said that even if electricity is invoiced separately, the supplies will still be considered a composite supply, and as such, the rate of the major supply—that is, the GST rate on the rental of real estate and premise maintenance, if applicable—would apply.

How does composite supply work?

A "composite supply" is defined as a supply made by a taxable person to a recipient that consists of two or more tax-deductible purchases of goods or services, or both, or any combination of the two, that are naturally bundled as well as supplied in conjunction with each other in the regular course of business, with one of those supplies being a principal supply, as per Section 2(30) of the central taxes on goods and services Act (the "CGST Act").

This indicates that the supply of products, packing materials, transportation, and insurance is a composite supply, and the supply of goods is a major supply in situations when commodities are packaged and carried with insurance. For instance, if a buyer pays Rs 30,000 for a fridge, the vendor notifies him that the fridge is subject to 18% GST and that he must pay an extra Rs 500 for the packaging, which is subject to 12 percent GST. The vendor also notifies the buyer that there will be delivery fees of Rs 1,000 and 5 percent GST. In this instance, purchasing a refrigerator constitutes the primary supply and is subject to an 18% GST; all other costs are considered ancillary. Composite supply refers to the bundle, or the whole product.

According to Section 2(90) of the CGST Act, a "principal supply" is any provision of goods or services that is the main component of a composite supply and to which all other supplies that are a part of it are ancillary.

The Circular makes it clear that the provision of electricity, in conjunction with the rental of real estate and/or grounds care, constitutes a composite supply of services when it comes to the rental of immovable property. It made clear that the rental of real estate and/or facility upkeep constitute the primary supply in the provided bundle of services, with energy serving as an additional supplier.

According to tax experts, the renter would be responsible for paying this, which might have an effect on rent and the maintenance fee that the owner charges and deposits with the tax department.

The existing situation

Different procedures are now used to collect power payments from consumers or renters, depending on the situation. When recovering power costs from homeowners or business space owners, real estate developers, RWAs, etc. do not impose any GST on them. On the other hand, power costs for tenants in shopping centers, airports, and other commercial venues are usually included in the leasing service price and are subject to 18% GST. Furthermore, according to Saurabh Agarwal, Tax Partner, EY India, "GST is anyway exempt in the case of rental of house rentals, so no GST is applicable on power charges, irrespective of how they are charged."

The explanations provided by the most recent circular

The following explanations are provided by the recently released circular:

Even if electricity is paid individually, the provision of electricity in conjunction with the rental of real estate and/or the upkeep of premises, as applicable, constitutes a composite supply and is subject to taxation as such.

If real estate developers, owners, or RWAs provide the power, it won't be included as part of the value of supply if they recover the energy costs using a pure agent model or based on the actual rates set by DISCOMs or State power Boards.

After the aforementioned explanation, "we do not see any material change or impact from the GST standpoint." However, if power is being paid on a cost-to-cost basis (with sufficient explanation) in certain situations involving the rental of commercial premises, a decision may be made to not tax GST on such an amount, according to Agarwal. "The said condition was also possible even prior to this clarification; nonetheless the same is relevant only in case of commercial borrowing and in most cases the GST that was assessed was available as credit by the recipient, and thus, the industry was paying GST under a conservative basis," he said.

Therefore, practically speaking, there doesn't appear to be any influence on the GST implications or costs for end users, including business owners, renters, residential owners, or tenants, according to Agarwal.

What store/home owners need to look for

Smaller societies who use multi-point connections and direct invoicing with Discoms won't be impacted. From the perspective of the consumer, it is important to determine whether electricity is being recovered by RWA as part of maintenance charges, making it a component of the composite supply subject to GST, or if it is being recovered independently without any markup, according to Harpreet Singh, Partner, Indirect Tax, KPMG.

Bigger group housing societies will be significantly impacted by this CBIC clarification. Once again, the inhabitants will be the ones on the receiving end as they will be required to shoulder this additional 18% tax burden. When the GST component is taken into account, even the rents will increase. According to Rajiva Singh, head of the Noida Federation of Apartment Owners Associations (NOFAA), "It would be another hurdle for the AOAs in larger condominiums wherever the billing is already complex."

According to Payal Thaker, Partner, Indirect Tax, BDO India, the latest circular upholds the industry stance that reimbursement for power costs should not be subject to GST as long as it is provided in the form of a pure agent. Nonetheless, the same would be governed by the GST law's pure agent requirements. If the requirements for pure agents are not met, the matter will be subject to GST and the associated availability of ITC in accordance with the guidelines outlined in the GST Law. It would be important to see whether other fees, such water rates, are also exempt from the GST tax due to the pure agent restrictions that were explained in the circular.