GST on Rental Housing: New Rules to Adversely Impact Co-living And Student Housing Segments

Introduction

The recent GST changes have caused ripple effects across consumer segments. While some rates have been revised, many items previously excluded from the list have now been included.

Two new items are significant for the real estate industry. The first is the imposition of a 12% GST on boarding and lodging for rates less than Rs 1,000 per night. The second is an 18% GST on residential rentals for tenants with GST numbers. Both would significantly impact the rental housing market, particularly co-living and student housing.

GST on rent: Students may look for ways to save money:

Several student housing providers operate in the Boarding and Lodging category, with monthly fees ranging from Rs 10,000 to Rs 15,000 per month. In other words, they would be classified as ‘less than Rs 1,000 daily’ and were previously exempt from GST. With the new rule, the 12% surcharge would be borne by either the students or the service provider. In either case, it will affect the players’ operating margins. It remains to be seen how this rule will affect academic institutions that provide hostel facilities. However, it will undoubtedly skew the market as students seek cost-cutting measures.

Rent GST will prevent rental housing from becoming an organized sector:

Several co-living participants rent apartments from private landlords. They will be required to pay an additional 18% GST because they have a GST number, which may become unsustainable for their business. The rental yield on residential properties in India is only 2%-3%. As a result, the organized sector’s penetration and institutional investors’ participation in residential rental housing are minuscule. Rental housing is home to 28% of urban dwellers on average, exceeding 40% in states such as Tamil Nadu, Andhra Pradesh, and Karnataka. The imposition of GST would frighten many institutional players and hamper efforts to turn residential rental housing into an organized sector. Bringing residential rentals under GST, on the other hand, will cause distortion and will undoubtedly discourage private sector participation in the scheme. The Ministry of Housing and Poverty Alleviation also recognized the need for low-income urban migrants to access affordable rental housing and launched the Affordable Rental Housing Complex (ARHC) program in all cities, with public-private partnerships.

Rental housing is hoping for GST exemptions:

Currently, the industry is considering various options to make a case for specific concessions. Student housing operators argue that because a hostel is an essential part of academics, any premises taken on rent to accommodate students should be exempted or, at the very least, brought under the 5% category. To reduce the impact, some consider collecting and passing rent directly to the landlord and charging GST only on services. Others are considering moving to the 12% GST Boarding and Lodging category.