Avalara > Blog > Goods and Services Tax > Karnataka AAR allows applicability of GST on notional interest on security deposit

Karnataka AAR allows applicability of GST on notional interest on security deposit

  • Mar 3, 2021 | Manjula Muthukrishnan

The Karnataka bench of the Authority for Advance Ruling (AAR) has issued that a Goods and Services Tax is applicable on the notional interest on the security deposit.

A case from Bengaluru has come to light as the Karnataka AAR has issued a rather impactful ruling. The applicant, a business involved in leasing or renting out a commercial property, is looking to enter into a contractual agreement for renting immovable property to a party in Bengaluru. This contractual agreement involves a monthly rental cost of ₹1.5 lakh or an annual rental payment of ₹18 lakh, along with a refundable security deposit of ₹5 crores. Once the contract ends, the security deposit paid by the tenant is returned.

The applicant approached the Karnataka AAR seeking clarity on whether the applicant can seek a deduction in property and other statutory levies and whether the notional interest on the security deposit received would be considered liable under GST. Further, the applicant sought a ruling by the AAR to understand if they were entitled to exemption of tax under a general exemption of ₹20 lakhs.
The Karnataka bench of the Authority for Advance Ruling said that the applicant could not deduct property tax liabilities and other statutory levies to arrive at the rental income value.

The bench stated, “Notional interest has to be considered as part of the value of supply of service, if and only if the said notional interest influences the value of supply, i.e., the value of RIS service / monthly rent and is leviable to the Goods and Services Tax along with monthly rent at the rate applicable to the monthly rent.”
Additionally, the AAR further added that the applicant is entitled to an exemption of tax under the general 20 lakh exemption rule. This exemption is subject to the condition that the annual turnover (monthly rent and notional interest) doesn’t cross the prescribed threshold.

Avalara helps businesses of all sizes get GST return filing, e-way bill generation and e-invoicing right with cloud-based GST compliance solutions in India. Goods and Services Tax (GST) rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Manjula Muthukrishnan
Avalara Author Manjula Muthukrishnan
Manjula is the Managing Director of India operations at Avalara. Her role involves overseeing strategic operations in India with a special focus on strengthening the company's end to-end tax automation offerings in the market by enabling Indian customers navigate the complexities of the local indirect tax system - Goods and Services Tax. Prior to joining Avalara, she served leadership roles at renowned organizations like Infosys, HSBC and Socion Advisors. Manjula has been recognized by various internal and external forums for her contributions in the area of Corporate Social Responsibility.

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