Introduction
The Hon’ble High Court of Madras (‘HC’), in its recent decision in Thai Mookambikaa Ladies Hostel v. Union of India[i], ruled that renting a residential facility providing hostel accommodation will fall within the purview of exemptions under the GST regime. The HC emphasized that the intention of the legislature was never to burden the poor with tax, and hence, an exemption given to residential dwellings shall include hostels. Residential dwellings vary from person to person, and every man needs a residential dwelling. Drawing an analogy to homeless persons, the HC remarked that for a person living on the streets, that place will be his residential dwelling, and not having a toilet or the facilities to cook, wash, etc., will not mean otherwise. Similarly, having been provided with certain basic amenities to cook, clean, sleep etc., will not make a hostel akin to a hotel.
Brief Facts
In this case, the Petitioner ran a licensed hostel facility providing accommodation and food to college students and working women on a fixed monthly tariff. The Petitioner claimed that it was providing residential accommodation, which was in the nature of residential dwelling, to the hostel residents and, hence, it qualified for exemption from Goods and Services Tax (‘GST’) based on entry 12 of the exemption notification[ii].
On the other hand, the Respondents argued that the hostel facility did not qualify for the tax exemption given to residential dwellings, as the Petitioner had obtained a license for its operation, and it provided services similar to that of a hotel, motel, inn, guest house, campsite, lodge, houseboat, or the like, which also serve residential or lodging purposes.
When the Petitioner approached the Tamil Nadu State Appellate Authority for Advance Ruling in this regard, it was held that the Petitioner was not eligible for the said exemption and, accordingly, was subject to payment of GST at the rate of 18%. Aggrieved by this order, the Petitioner moved the HC by way of a writ petition.
Held
The HC ruled in favour of the Petitioner and held that it was entitled to be exempted from the levy of GST. It was noted that the hostel services provided by the Petitioner would squarely amount to a ‘residential dwelling’ and that it meets the conditions specified in the exemption notification for claiming such exemption. This condition is ‘renting of residential dwelling for use as a residence.’ Therefore, the services provided by the Petitioner were held to be covered under entry 12 of the exemption notification.
The HC pointed out that it is not the case of the Respondents that any commercial activities serving commercial purposes are being carried out on the rented premises; the inmates are using the common kitchen to prepare and share food among themselves. Admittedly, GST is not applicable if a residential property is rented out to persons in their personal capacity and for use as their residence. In other words, if a residential property is rented out for residential purposes, then the rental income derived from such property would not attract GST.
While discussing the legal principles, the HC reminded that it is a well-settled rule of statutory interpretation of fiscal statutes that if a word used in the statute is not well defined, it has to be construed in its popular sense; standard of popular sense would be that prevailing among people conversant with the subject matter of the statute.
The HC further observed that the imposition of GST on hostel accommodation should be considered from the perspective of the recipient of the service and not from that of the service providers. GST is imposed only on the recipient of the service, and it is collected from and deposited by the service provider with the Central Government. Therefore, to claim exemption from GST, the end-use of the service should be residential, which is determined by the purpose for which the property is used, i.e., as a residential dwelling. This exemption was not based on the nature of the property or the service provider’s business, but rather, it was based on the purpose for which the property was being used.
Analysis
This decision illustrates the legal principles governing the interpretation of a fiscal statute and emphasizes a people-centric approach to its implementation. While considering an exemption under entry 12 of the exemption notification, two questions must be asked: what is being rented and for what purpose is it being rented? Registration as a commercial establishment or the obtaining of a trade license is not relevant to the question of determination of GST exemption. The purpose of renting and the services being provided must be considered.
Further, this decision of the HC reinforces that an exemption provision should be interpreted liberally in line with its intended objective, especially if it is designed to incentivise economic growth or has other beneficial purposes. While providing relief to hostel owners, this judgment aligns with the legislative intent to reduce the tax burden on dwellers of residential premises.
End Notes
[i] [2024] 160 taxmann.com 667 (madras) [dated: 22.03.2024].
[ii] Entry No. 12 of the Exemption Notification No. 12/2017-Central Tax (Rate), dated 28.06.2017, exempts services by way of renting of residential dwelling for use as a residence from the GST regime.
Authored by Shivangi Bhardwaj, Associate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.