Tamil Nadu AAR: GST Applies When Partner Rents Out Property to Firm

The Tamil Nadu Authority for Advance Rulings (AAR) ruled that the Goods and Services Tax (GST) is applicable when a partner rents out the property to the partnership firm for business purposes, even for free of rent.

The Chennai-based Mr Shanmuga Durai (applicant) is the firm’s managing partner and owns a few properties in an individual capacity. He stated that the firm uses his properties to conduct businesses free of rent.

In his application, he stated that it is clear under the Income Tax Act that when the partner uses his property for businesses carried out by the firm, deemed rent does not arise. So, the applicant wants to seek clarity from AAR whether the same holds under GST law?.

The applicant raised four queries. 

1. Whether GST liability arises when a partner rents out the partnership firm to carry out the business free of rent?.
2. If GST is applicable, what is the relevant section or rule or provision in GST law to pay GST on notional rent?
3. Is it compulsory to execute a rental agreement between partner and partnership firm when there is no furtherance of business for that partner? and
4. Which valuation rule should be applied when the partner’s consideration is not fixed and not received?

The AAR has gone through all the facts and arguments and ruled this transaction shall be treated as related party transactions. Accordingly, Rule 28 of the CGST Act related to the value of supply between distinct or related persons will apply. 

The value of such supply will be the open market value. If the open market value is unavailable, the applicant shall consider the like kind and quality supply’s value. 

Also, AAR said that the applicant and the partnership firm in which he has a major share are two different individuals, and renting out immovable properties between them even without consideration is a taxable supply.

Thus, the firm is liable to pay GST in respect of the applicant’s properties used to carry out the business, even if it is free of rent. This activity is in furtherance of business and constitutes supply as per GST law.

Even though the AAR ruling applies only to the applicant and the jurisdictional tax officer in that particular matter, it can be relied upon in similar cases. Also, the Central Board of Indirect Taxes and Customs (CBIC) uses rulings pronounced by AARs and Appellate AARs while amending GST rules.

For any clarifications/feedback on the topic, please contact the writer at dvsr.anjaneyulu@cleartax.in