Saturday, July 20, 2024

IN FOCUS :Gabbar Singh Tax vs GST :If you extort, how can it be GST? 

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Six years is quite long enough to understand the pros and cons of the Goods and Service Tax (GST), obviously imposed without adequate study and preparation to complicate the lives of people who pay their taxes honestly in the country. Of course, if you can fudge records, evade taxes, and turn a willful defaulter on multiple bank loans, the system will not hound you; for you would only be a VIP fugitive. For the aam admi, GST has been and will remain ‘Gabbar Singh Tax’ — as it was first described by those who can’t see proper reasoning behind its imposition on some of the goods and services.
For instance, the Authority for Advance Ruling (AAR) in Bengaluru recently ruled that hostels are not residential dwelling units and are henceforth not exempt from GST. This week, Tanisha Saxena talks to people to assess the legality and ethics behind the imposition of GST on hostels’ rents and looks at the implications of this ruling beyond those on the applicants.

“In the process of nation building, we often arrive at a moment which leads us to a path-breaking juncture and opens up a plethora of opportunities imploring us to aspire for new dreams. At the stroke of the midnight hour today, together we shall ensure a pioneering future of the nation. Within a few moments from now, our nation will embark upon a new economic regime. The entire 1.25 billion citizens of the country are a witness to this historical event.

I do not believe that this process at GST is restricted to the scope of economy only. This momentous occasion stands today as a testimony to the concept of co-operative federalism in Indian democracy. This hallmark day was possible due to the relentless efforts put in over decades by several stalwarts under whose guidance various teams developed this GST framework,” said Prime Minister Narendra Modi in his speech at the Launch of GST from Parliament in July 2017.

Six years later, we stand at a crossroad trying to figure out what good it has brought into the lives of people and especially the lower- and middle classes of the country who invariably pay taxes. Inflation has almost choked the middle class and poor people.

Recently, in two separate rulings the Uttar Pradesh and Karnataka AARs clarified that hostel stays or PGs are categorised as ‘non-residential’. It simply means that now the students will have to pay 12 per cent GST just like the way small hotels and Inns charge from guests.

Doctor G. Vijay, professor of economics in University of Hyderabad, asserts: “This seems to be the consequence of changes made to ‘residential’ classification by state governments. This is perhaps for increasing state revenues. It will certainly affect rentals for youngsters residing in urban areas for educational or work purposes. This could mean education could become more expensive for youth. Middle class will be adversely affected.”

As per Census 2011 (the last one), a total of 32,96,340 men and 21,61,216 women have migrated from their native places across India because of education. Men constitute 60.4% and women 39.6% of this category of migrants. Of those who migrate for education, 60.4% and 60.5% from rural and urban areas respectively are males and the rest constitute females. Together they constitute 1.2% of the total migrants in India.

The 2011 Census data shows that, for education, the largest migrant state was the erstwhile Andhra Pradesh (including Telangana) with 9,33,354 migrants or more than 16% of the total migrants in this category.

Doctor Vijay amplifies: “I am shocked. How can this be the case when it directly impacts the students, subsequently affecting youth vote in the upcoming elections? It definitely needs clarification and reassessment. The students who migrate from one state to another already struggle a lot. Many families rely on loans for the further education of their child. Now, 12% GST would have a huge impact on the pocket of students.”

Shipra Sharma, a student of BA(Hons) from University of Hyderabad, says, “I have a single parent and she too lost her job during the pandemic. It is extremely difficult to pay high rent. I moved from Moradabad, Uttar Pradesh to Hyderabad a year ago to do my graduation. When we decide to move to a different state we already face so many challenges that an increase in rent would simply break everything apart. I really hope this ruling is not applicable in other states.”

Before, we understand the concept of GST on hostels’ rent, let’s first understand the provisions of GST in relation to any accommodation:

1. CGST Act 2017 has provided that certain activities or transactions as provided under Schedule II (Section 7) are to be treated as Supply of Goods or Supply of Services.

Accordingly, the following clause is of importance for our discussion:
– Clause 2. Land and Building –

(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

2. Later, the Act has provided for a specific exemption vide Notification No. 12/2017-

Central Tax (Rate) issued on 28th June 2017 for the following:

– Sl. No. 12 – Heading 9963 or Heading 9972: Services by way of renting residential dwelling for use as residence.

– Sl. No. 14 – Heading 9963: Services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having declared tariff of a unit of accommodation below one thousand rupees per day or equivalent.

3. However, Notification No. 04/2022 -Central Tax (Rate) dated 13th July 2022 has provided that serial number 14 and the entries relating thereto shall be omitted.That means the exemption provided above is removed in 2022.

So, till the time the exemption was removed, all the hostels were making use of this exemption notification as the rent any way will not exceed Rs. 1,000 per day in most of the hostels.

4. Now they are left with only one option of exemption i.e., under Sl.No. 12. That is, to consider the hostel as “residential dwelling” used for residential purposes.

The crux is, CGST Act has nowhere defined “residential dwelling” and hence it has become difficult for the exchequer to charge GST on hostels even after lifting the exemption provided under Sl. No. 14.

5. Now coming the question of Advance Ruling given by the Karnataka and Uttar Pradesh AARs on not considering hostels as “residential dwelling” used for residential purposes.

They have interpreted that the “residential dwelling” means which is leased for the purpose of permanent residence for a specified period of time and which has facilities which are used generally by residents such as kitchen etc., which obviously hostels will not have individual kitchens for each of the residents.

Purpose of GST on hostels rent

CA Vijay Srinivas Kothapalli explains, “GST is charges on all services, irrespective of nature, except for those which are specifically exempt from taxation vide Exemption notifications. As the residential houses are exempt from GST, hostels were considering themselves as residential units and hence were taking the shelter of exemption notification. As mentioned above, till 13th July 2022 even hostels etc., which were charging lease rent of Rs. 1,000 or less per day are exempt. Whereas the exemption was removed from 13th July 2022.”

But why this step now when it would directly impact the youth and subsequently affect votes? “This step is not yet taken by the Government through the Act. It is only the advance ruling given by AARs of Karnataka and Uttar Pradesh wherein it would be applicable to only those States. However, now that they have made this interpretation the GST Council might consider this and accordingly may notify them in future meetings. The GST Council may not consider this point immediately till the elections. However, we cannot rule out this after the elections,” says CA Kothapalli.

The implications of this GST on hostels rent

One major implication will be on those states which depend mostly on education system and Universities such as Telangana, Andhra Pradesh, Delhi, Mumbai, Karnataka etc., because 40-50% of the outstation students stay only in hostels, though rest might stay in shared rooms, university premises etc.

Kothapalli gives an example to break down the situation. If the hostel is charging Rs. 5,000 per month from a student, including food etc., after this amendment takes effect, it will be Rs 5,900 per month. Though we might see a direct increment of Rs. 900 i.e.,18% the burden of tax will be totally on student, because the hostel owners will claim Input Tax Credit on grocery purchases, internet provision, furniture purchases etc.

Continuing the above example, let’s assume there is a hostel with 25 rooms provision and assuming there is 100% occupancy and for which they are charging rent of Rs. 5000 per room, which includes Rs. 3000 for food, Rs. 1000 for internet, TV, Study room etc., and Rs. 1,000 is margin.

Total rent from rooms: Rs. 5,000 X 25 = Rs. 1,25,000
GST on this amount = Rs. 22,500
So, total amount charged from students = Rs. 1,47,500 ÷ 25 = Rs. 5,900 per student
Whereas the hostel GST workings will be as under:

Total GST payable = Rs. 22,500

GST on inputs:
Kitchen groceries: Rs. 3000 X 25 = 75000. GST on this is Rs. 13,500
Internet and TV bills etc., assuming a total of Rs. 5000. GST on this Rs. 900
Therefore, the hostel will pay GST of Rs. 8,100 after adjusting above GST on inputs.

So, the entire burden of GST will be only on students and hostel owners will not feel its impact. Unlike other businesses, hostel business is mostly unorganised in structure, and it would be a herculean task for the GST authorities to ensure proper tax collection from the hostels. Already there is a huge gap identified in GST collection from hotel businesses from that of actuals.

We have witnessed many surprise raids by GST authorities have unearthed duplicate POS systems engaged by hotels and thereby paying less tax than actuals. If business like hotels have such issue, we can imagine the magnitude of deficiencies in collection from hostels.

Essential commodities

We are gearing up for the 2024 General Election and sixteen per cent of the population think that inflation will have a huge impact this time. On the contrary, 14 per cent of people believe that it is uncontrollable and that there’s no politics in this. They also think that it is all because of the tensions that spread due to Russia-Ukraine war.

If we look at the consumer sentiments index in 2023, then we observed a growth of about 0.9% in the month of May, while the cumulative growth for the first five months of 2023 stood at 17.4%, a tad lower than 17.9% in the corresponding months of 2022, as noted by CMIE (The Centre for Monitoring Indian Economy) in the labour report.

In July 2022, the ruling party was slammed for the levy of GST on essential items such as pulses, cereals, and rice. The Congress had said it is Gabbar Singh Tax! Similarly, Delhi’s Chief Minister, Arvind Kejriwal called GST on essential commodities an ‘ill-thought-out and arbitrary’ step. Well, all these comments hold importance because today the high inflation is evidence of the fact that the GST imposition has done more harm than good. It directly impacts the household budget.

On the other hand, Union Finance Minister, Nirmala Sitharaman made it specific that the step has been taken owing to the revenue leakage cases wherein businessmen are misusing the exemption provision for unlabelled food items by not registering them.

Commenting on this, financial analyst Harsh Kumar shares: “GST is a clean path which leaves no scope for fraudsters. Once your business is registered under the GST Act one has to present a crystal clear picture of their business. I have seen even small businessmen paying GST because they want to work systematically. And their business has in fact grown up significantly in a span of two years.”

We might consider that the decision to impose GST on hostels has been taken in the light of some unavoidable reasons. However, it remains a matter of scrutiny.

Considering the social impact of the decision to identify hostels as “commercial dwellings”, instead of treating them as “residential dwelling”, for the purpose of GST and also the amount of collections which the exchequer will have from this business and also considering the utilisation of the tax infrastructure in making such collections, it may not be a right decision on the part of government to include the hostel collections under the purview of GST.

Apart from the direct impact of GST, students also have to bear the cost of compliance i.e., to ensure filing of GST Returns along with proper reconciliation of ITC will require a proper consultant or account whose charges in present market is around Rs. 15,000 per month. This cost also will be recovered from students, increasing the overall impact of hike in hostel charges by 20-25%, which is pretty high on the pockets of students from middle and lower classes.
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