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The Central Board of Indirect Taxes and Customs (CBIC) has announced that property rent, when combined with electricity charges, will be subject to the Goods and Services Tax (GST) when collected by real estate companies, malls, airport operators, among others, from occupants. However, if these entities act as agents of state electricity boards or distribution companies (DISCOMs), the electricity charges won't be taxed. This clarification is significant because electricity falls outside the purview of GST.
The CBIC issued a circular addressing doubts regarding the applicability of GST to electricity supplied by real estate companies, malls, airport operators, and others to their lessees or occupants. The matter was discussed during the GST Council meeting on October 7. Based on the Council's recommendation, the CBIC clarified that when electricity is bundled with property rent and maintenance charges, it constitutes a composite supply and should be taxed accordingly.
In a composite supply, two or more goods or services are naturally bundled, and the predominant element is considered the principal supply, with the applicable GST rate extended to the entire supply. In this case, the principal supply is renting immovable property and/or maintaining premises, while the supply of electricity is considered ancillary. Even if electricity is billed separately, the entire supply will attract GST at the rate of 18 percent.
However, the CBIC noted that when electricity is supplied by real estate owners, resident welfare associations (RWAs), real estate developers, etc., as pure agents, it won't be included in the value of their supply. Furthermore, if they charge for electricity based on actual costs, matching the rates charged by state electricity boards or DISCOMs, they will be regarded as acting as pure agents for this supply.
Despite the prevalence of confusion on some aspects, the CBIC's clarification provides guidance on the treatment of electricity charges when bundled with the rental of immovable property and/or maintenance of premises. This clarification provides the tax department with a basis to address previous issues and potentially issue new notices to landlords who have not charged GST on electricity reimbursements.
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