A 12 percent GST will now be levied on rent paid for hostel accommodations and by paying guests, the Authority for Advance Rulings (AAR) in Karnataka said in an order on Friday. There was a confusion on whether or not the rent on hostel stays or PG accommodations are exempt from GST.

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In two separate rulings by Uttar Pradesh and Karnataka AARs, these accommodations have been categorised as ‘non-residential’ and hence will now be liable to 12 percent GST just like the small hotels and Inns.

“PG/Hostel Rent paid by inhabitants do not qualify for GST exemption under SI No. 12 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as the services provided by applicant are not akin to renting of residential dwelling for use as residence,” MP Ravi Prasad and Kiran Reddy T of the Karnataka AAR ruled.

Important to note that there is no GST levy if a house is rented for the purpose of residence by individuals who are not required to register for GST.

In a recent ruling in the case of Srisai Luxurious Stays, a Bengaluru-based PG and Service-apartment providers, the Karnataka AAR said that if an accommodation provides a room that is shared by strangers and doesn’t have individual kitchen facility, it won’t fall within the meaning of a residential dwelling.

The AAR also noted that the allied additional services provided by the LLP are not naturally bundled services with the applicant's Hostel/Paying guest accommodation service.

“It could be inferred that residential dwelling is a residential accommodation meant for permanent stay and does not include guest house, lodge or like places. In the instant case, the applicant in his own admission claims to be providing PG/ hostel services which inter alia refer to 'paying guest accommodation/ hostel' services and are akin to guest house and lodging services and therefore can't be termed as 'residential dwelling',” the order by the Karnataka AAR stated.

Tax experts believe that the orders by the Karnataka and UP AARs will be taken as ‘permanent precedents’ by the GST council. They believe that PGs and hostels were missing earlier from the GST law and hence there was a loophole.

“There was a confusion on GST levied on PGs and hostels. Most people were not paying any GST. Some were charging 5 percent, some 18 percent and most NIL. Hence this ruling comes as a direction. The AAR has now stated that it is a 12 percent. The direct impact will be on students who stay in these PGs and hostels. The cost of education will go up,” says Sharad Kohli, tax expert based in Delhi.

The cost of education for out-station students could go up after this ruling as it has a direct impact on their living cost. However, some tax experts also believe that the orders are obtuse and can be challenged.

“A hostel qualifies as a residential dwelling, as has been settled by certain high court decisions. The advance rulings have adopted an unreasonable and obtuse view, to deny the residential dwelling status to hostels and so, the exemption. This view, expressed by the UP and Karnataka benches of the AAR are obtuse and can be challenged," said Ranjeet Mahtani, Partner, Dhruva Advisors.

"As for bundling of other supplies (washing machine, TV set, etcetera) these help establish the residential nature of the building and ideally, deserve to be bundled with the principal supply (of residential dwelling) and not be taxed,” Mahtani added.

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(Edited by : Keshav Singh Chundawat)

First Published:Jul 29, 2023 6:34 PM IST