The Karnataka Authority of Advance Ruling (AAR) ruled that GST can be levied on the notional interest on the security deposit.
The Applicant, M/s Midcon Polymers Pvt. Ltd. have proposed/ planned for engaging in the business of renting commercial property on monthly rents and allied business. They intend to enter into a contractual agreement of renting an immovable property with an educational institution in Bangalore.
The Contract is on the basis of the reserved monthly rent of Rs 1.50 lakhs or Annual Rent of Rs.18 Lakhs and also refundable caution deposit of Rs 500 Lakhs, which shall be returned without interest on the termination of the tenancy. Further, since the applicant is required as per law to refund the advance caution deposit, the same does not in any way determine the quantum of rent.
The issue raised in this case was for the purpose of arriving at the value of rental income, whether the applicant can seek deduction of property taxes and other statutory levies.
It was further asked that for the purpose of arriving at total income from rental, whether notional interest on the security deposit should be taken into consideration and whether the applicant is entitled for exemption of tax under the general exemption of Rs.20 lakhs.
The coram consists of Dr. Ravi Prasad and Mashood Ur Rehman Farooqui ruled that the applicant can not deduct the property taxes and other statutory levies for the purpose of arriving at the value of rental income.
“Notional interest has to be considered as part of value of supply of service, if and only if the said notional interest influences the value of supply i.e. value of RIS service / monthly rent and is leviable to GST along with monthly rent at the rate applicable to monthly rent,” the AAR ruled.
The Authority further added that the applicant is entitled to exemption of tax under the general exemption of Rs.20 lakhs, subject to the condition that their annual turnover, which includes monthly rent and notional interest if it influences the value of supply, does not exceed the threshold limit.
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