Will you have to pay GST if electricity charges are bundled with rent or maintenance fees?

As per Section 2(30) of Central Goods and Services Tax Act (“CGST Act”), "composite supply" has been defined to mean a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

This means that where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply. For example, a buyer purchases a fridge for Rs 30,000 and the commodity attracts a GST of 18 percent; the vendor informs the buyer that he would have to pay an additional Rs 500 for the packaging which in turn attracts GST of 12 percent; he also informs the buyer that delivery charges of Rs 1,000 also have to be paid and GST at the rate of 5 percent will be charged. Buying a fridge in this case is the principal supply and the GST that it attracts is 18 percent, the other charges are ancillary charges. The entire package (the bundle) is referred to as composite supply.

As per Section 2(90) of CGST Act, "principal supply" has been defined to mean the supply of goods or services, which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.

In the context of renting of immovable property, the Circular has clarified that supply of electricity along with renting of immovable property and/or maintenance of premises is a composite supply of services. It clarified that in the given bundle of services, the principal supply is renting of immovable property and/or maintenance of premises, and the supply of electricity is an ancillary supply.

Tax experts say that this would have to be borne by the tenant and may impact rents and the maintenance fee charged by the owner and deposited to the tax department.

The current scenario

Currently, varied practices are followed in terms of the recovery of electricity charges from the users or tenants (as the case may be). The real estate developers, RWAs etc. do not charge any GST from the home/ commercial space owners for the electricity charges recovered from them. Whereas, in the case of tenants located in malls, airports, and other commercial spaces, the electricity charges are typically bundled in the value of rental services and subject to GST at the rate of 18 percent. Moreover, in the case of rental of residential properties, GST is anyway exempt and thus no GST is applicable on electricity charges, irrespective of how they are charged, explains Saurabh Agarwal, Tax Partner, EY India.

The clarifications issued by the recent circular

The recent circular issued provides the following clarifications:

Electricity supplied along with renting of immovable property and/or maintenance of premises, as the case may be, forms a part of composite supply and shall be taxed accordingly, irrespective of the fact that electricity is billed separately.

However, if electricity is supplied by Real Estate Owners, RWAs, or Real Estate Developers, it would not be considered a part of the value of supply if they recover the electricity charges on a pure agent basis or based on the actual charges by the State Electricity Boards or DISCOMs.

Considering the above, “we do not see any material change or impact from the GST standpoint post the above clarification. However, in specific instances relating to renting of commercial spaces, if the electricity is being charged on a cost to cost basis (with adequate justification), then a position may be taken to not levy GST on such amount,” said Agarwal. “The said position was also possible even prior to this clarification; however, the same is only relevant in case of commercial renting and in most cases the GST so charged was available as credit to the recipient, and thus, the industry was paying GST on a conservative basis,” he added.

“Therefore, effectively, there does not seem to be any impact on the GST implication or cost for the end users, be it the residential owners, residential tenants, commercial owners and tenants,” said Agarwal.

What home/shop owners should check

“Smaller societies having direct billing with Discoms with multi-point connections shall not be affected. From a consumer standpoint, one would need to check whether electricity is being recovered as part of maintenance charges by RWA, and hence becomes a part of composite supply liable to GST, or whether the same is being recovered on a standalone basis without any mark up,” said Harpreet Singh, Partner, Indírect Tax, KPMG.

Larger group housing societies would be affected greatly by this clarification from CBIC. The residents will be at the receiving end again as they will have to bear this increased tax burden of 18 percent . “Even the rentals will go up once this GST component is factored in. In larger condominiums where the billing is already complex, it would be another challenge for the AOAs,” said Rajiva Singh, president, Noida Federation of Apartment Owners Associations (NOFAA).

Payal Thaker, Partner, Indirect Tax, BDO India, said that the recent circular reaffirms the position adopted by the industry that as long as the reimbursement of electricity charges is in the nature of pure agent, the same shall not be leviable to GST. However, the same would be subject to the pure agent conditions laid down under the GST law. In cases where the pure agent conditions are not satisfied, the same would be leviable to GST with the corresponding availability of ITC as per the conditions prescribed under the GST Law. It will be worthwhile to see whether the benefit of exclusion from the GST levy on the basis of pure agent conditions as clarified in the circular is extended to other charges such as water charges as well.