Reduction in rent or license fees due to Covid-19 – GST impact
All businesses have suffered under the present Covid-19 crisis. For most of the businesses, the cash flow has dried up with no guarantee as to when things will get back to normal. Under the circumstances, retaining funds in the business is essential for the long-term survival of the business enterprise.
Property owners who have let out their commercial properties on rent under leave license agreements are not exempt from this crisis. We have come across many instances where the lessee or the licensee has requested the lessor or licensor to reduce the rent/license fee or indeed, waive the rent altogether. In this short article, we have attempted to answer some of the most frequent questions on the GST impact from the licensor/landlord’s point of view,
1) Should the licensor raise an invoice?
As per Section 31 of CGST Act, 2017, invoice for services has to be raised within the prescribed time.
We refer to Notification 35/2020 – CT dated 03/04/2020, The notification has extended the compliance due dates for the specified compliances. However, the extension does not apply to Section 31, among others. Hence, it is understood that the tax invoice has to be raised within the prescribed period.
If no agreement is reached as to revised/reduced rent, the licensor can raise invoice at the license fees agreed upon in the Leave License agreement. Needless to state, the GST will have to be deposited as per due dates.
Alternatively, the Licensor may not issue invoice at all based on the ground that the premises were not occupied during the lockdown period, hence, the service of renting was not rendered at all. As service was not rendered at all, the question raising the invoice does not arise. Please examine the ‘Force Majeure’ clause of the leave license agreement.
2) What would be GST implications if tenant refuse to pay rent?
Ultimately, if the rent is not paid by the licensee, a credit note can be issued, again, based on the ground that the premises were not occupied during the lockdown period, hence, the service of renting was not rendered at all.
3) If tenant agrees to pay only a partial rent?
If full invoice for normal license fee was raised earlier, then Credit note will have to be issued for the differential amount as the value of invoice has been re-negotiated.
If the licensor had not issued any invoice and is now issuing invoice at the re-negotiated rent amount, then invoice for appropriate re-negotiated amount can be raised.
However, as per Section 34(1) a credit note is to be issued only if there is a deficiency in services. In case of partial rent, no deficiency exists. If zero rent is paid for the lockdown period, the ground that no service is rendered can be taken, but in case of partial rent, it may be difficult to justify.
On a practical note, the department may not object to such a situation as it was beyond control of any of the parties. In our personal view, the licensor should go ahead and issue a credit note for the differential amount if full invoice was raised earlier. Again, shelter can be taken under the ‘Force Majeure’ clause of the leave license agreement
Further, on the question of valuation for partial rent, even if the department contests, we do not think it can succeed because as per Section 15, in cases where the Licensor and Licensee are unrelated parties, the transaction value, i.e., the invoice value has to be taken as value of supply.
I also refer to Section 15(3) of the CGST Act, 2017. Accordingly, discount amount is not to be included in the taxable value provided the discount is agreed upon by the parties before or at the time of supply. Taking shelter of Section 15(3) will require proper documentation.
From the point of view of documentation for the purposes of Section 15(3) and even otherwise, a supplementary agreement for re-negotiated rent/license fee can be made right now, ideally by digitally signing. If digitally signing is not possible, E mail exchange can be made of the renegotiated terms for lock-down period. Once normalcy returns, such agreement can be physically signed by both parties by paying additional stamp duty, if applicable. Proper documentation should not be ignored as it will help the licensor in case of litigation.
4) License premises is in the possession of licensee, his furniture, property etc. are in the premises. Landlord is providing services to the tenant as per agreement. In this case can department ask to pay GST as landlord has provided services?
This could be a litigious matter. On legal grounds, one may argue that the licensee was unable to use premises, hence, service was not rendered, whether due to circumstances beyond Licensor’s control or otherwise, is a different matter. Fact remains that the Licensee was unable to receive the service, hence the supply of licensor’s services was infructuous. Therefore, the question of paying GST does not arise. The argument will have to be tested before adjudicating authorities. One has to wait and see.
5) What is the implication if the licensor/landlord issues legal notice for unrealised rent?
Legal notice is of no relevance. GST is payable if it is proved that the supply had occurred.
6) If tenant agrees to pay rent after some months?
If the Licensor has already raised full invoice, the GST would already have been paid by the Licensor. If rent is received after some months, then there is no problem from GST perspective.
If licensor has not raised invoice, and invoice for the current period is raised after a few months, the Licensor may be liable to pay interest, also penalty provisions may apply for not raising invoice within prescribed period.
We trust the above discussion will help the reader in discharging their GST obligations in these uncertain times. Questions or comments of readers on this article are welcome.
Dipen Lathi,
Chartered Accountant
www.Lathico.com
DISCLAIMER : No assurance is given that the revenue authorities/ appellate authorities/ courts would concur with the views expressed herein. Our views are based on the existing provisions of law and our interpretation thereof. We do not assume responsibility to update the views consequent upon such changes, if any. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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