Reverse Charge Mechanism (RCM) on Commercial Property Rent

The goods and services tax system in India had a unique mechanism called Reverse Charge Mechanism (RCM) which is the input part of the supply chain so this tax system imposes a taxable burden on the consumer who buys goods or the services to the customers. In the context of commercial property rent, RCM is a vital factor for deciding who is responsible for paying GST i.e., the landlord or the tenant. In this article we will explain the theory of RCM and its technical implications.

What is Reverse Charge Mechanism (RCM)

Generally, when you pay for the goods or services, the supplier collects the GST on behalf of the government and then  you pay for the goods and services including the applicable GST. Even though GST amounts are passed onto the customers in specific situations. It is called RCM (Reverse Charge Mechanism).

Rather than the service provider charging and collecting GST from the recipient, the recipient is the one accountable for remitting the GST to the tax authorities. This is built into the mechanism so that the tax is paid with the incidence of the supplier being either registered or not registered under GST to ensure tax compliance and prevent revenue leakage.

Normal Payment GST Process

GST Payment in Case of Reverse Charge

RCM in the Context of Commercial Property Rent

For commercial rental property, the Reverse Charging Mechanism (RCM) refers to a specific tax arrangement where the responsibility for paying taxes shifts from the service provider (landlord) to the service recipient (tenant) . Under RCM, the tenant has to pay service tax (GST) directly to the government.

This approach generally applies when the landlord is an unregistered company or falls under a scheme of composition, making them ineligible to collect GST from the tenant In such cases, they are required to calculate GST on the rental income and pay it to the government under RCM schemes.

RCM ensures that tax obligations are met in respect of commercial rental property, even if the landlord does not register under GST or claim. By transferring tax compliance responsibility to the tenant, he accelerates tax collection and delays real estate tax evasion. To prevent penalties or legal repercussions, landlords and tenants must comply with RCM standards and stay on top of their tax obligations.

How Does RCM Works

1. If the landlord is not registered under GST and the tenant is registered, the GST responsibility of paying it gets shifted from the supplier (landlord) to the recipient (tenant) under RCM.

2. The tenant should calculate the GST payable amount and pay it to the government by himself.

3. The tenant is obliged to provide the landlord with a payment voucher, which informs of the GST amount paid on the tenant’s behalf.

4. The applicant can also claim ITC on GST paid under RCM, though this is subject to certain conditions.

Key Points on RCM in Commercial Property Rentals
In RCM, the tenant pays the GST on the rent directly to the government while the unregistered landlord pays no tax.
For commercial properties rented out, the GST under the RCM mechanism is 18% of the rental value.
RCM norms are to be followed strictly by the tenants, few of which among others are self-assessment, issuance of payment vouchers, filing GST returns, and claiming input tax credit (ITC).
Both coworking space providers and the landlord will be deemed to hold a GST liability if the latter is unregistered under RCM.
RCM seeks to keep tax payments in accordance with the law and prevent revenue leakage where extra obligations and operational costs are created for tenants.

Applicable Tax Rates and Compliance Requirements

The tax rate applicable under RCM for commercial property rent is 18% of the rental value. This means that if the monthly rent is Rs. 100,000, the tenant must pay Rs. 18,000 as GST to the government.

Compliance Requirements for Tenants Under RCM Include

1. Self-assessment of tax liability: The tenant needs to compute the GST payable on the rent amount and add it to their GST return system.

2. Issuance of payment vouchers: The tenants should be responsible for issuing payment vouchers to the landlord, and the GST portion should be indicated as having been paid.

3. Filing GST returns: The tenant has to complete the GST forms and mention the RCM amount paid by the landlord.

4. Claiming Input Tax Credit (ITC): The tenants are all entitled to claim credit of GST paid under RCM provided that the conditions set out in the GST laws have been complied with.

Implications for Landlords and Tenants

For Landlords:

1. It is not mandatory for the un-registered landlords to charge the GST on the rent as the responsibility in such a case moves to the tenant under RCM.

2. Landlords have to give the tenants the necessary paperwork, rent receipt or invoice, for the purpose of compliance.

3. Landlords will face hardship in dealing with registered tenants being subject to RCM requirements.

For Tenants:

1. The tenants are faced with the extra obligation to pay the GST on the rent, which in turn causes an increment in the operating cost.

2. RCM necessitates tenants to adhere to certain requirements, such as filing GST returns and dispatching payment vouchers, which is an extra burden on them.

3. Rents can be claimed for Input Tax Credit (ITC) on GST paid under RCM which may be offsetting some of the additional costs and subject to rules.

4. Registered tenants often prefer dealing with registered landlords to avoid the complicated procedures in the RCM.

Coworking Space Providers: Key Players in the Commercial Property Market

The coworking space providers have now become the major players in the commercial property market sector and are offering the flexible workspace solutions to small businesses, startups and freelancers. Those businesses usually rent commercial space from landlords and then sublease them to their customers.

The coworking space providers are the tenants under RCM. If the landlord is unregistered, the coworking space provider is responsible to pay GST under RCM on the rent. The extra cost may be transferred to their clients through the means of rental charges.

The providers of the coworking space must meet the RCM requirements, including those of self-assessment of tax liability, issuance of payment vouchers and so on.

The Reverse Charge Mechanism (RCM) is a special provision enacted under the Goods and Services Tax(GST) law which makes the recipient of the goods or service bear the tax liability in certain situations. The scope of RCM covers the situations when the landlord is not registered and the tenant is registered with GST in the commercial rent context.

FAQs on Reverse Charge Mechanism (RCM) on Commercial Property Rent