GST Exemption For Residential Lease Applies When Lessee Sub-Leases Building For Hostel/PG Use : Supreme Court

In a significant judgment that will have wide ramifications for hostel and paying guest (PG) accommodation sectors, the Supreme Court held that the exemption from Goods and Services Tax (GST) available for renting residential dwellings continues to apply even when the lessee sub-leases the premises to provide hostel or PG accommodation. The Court ruled that the exemption under Entry 13 of the GST Exemption Notification No.9/2017 dated 28.06.2017 does not require the lessee to personally use the property as a residence, so long as the ultimate use of the premises is residential in nature.

A bench of Justice JB Pardiwala and KV Viswanathan delivered the ruling while deciding a dispute concerning a four-storeyed residential building with 42 rooms in Karnataka. The building's owner had leased it to M/s DTwelve Spaces Private Limited, a company operating as an aggregator providing long-term hostel accommodation to students and working women. The tax authorities took the view that GST at 18 percent was payable on the rental transaction because the lessee was a commercial entity and did not itself occupy the premises as a residence. Both the Authority for Advance Ruling (AAR) and the Appellate Authority for Advance Ruling (AAAR) upheld this interpretation. However, the Karnataka High Court set aside the rulings of AAAR and AAR, holding that the GST exemption will apply. Challenging the High Court's judgment ,the revenue appealed to the Supreme Court.

The core issue before the Court was whether leasing a residential building to an aggregator, who then sub-leases the rooms to multiple residents for long-term stay, qualifies as “renting of residential dwelling for use as residence” under Entry 13. The bench undertook a detailed interpretation of the expression “residential dwelling,” noting that neither the Central Goods and Services Tax Act nor the notification defines the term.

Referring to how the expression is ordinarily understood, the Court observed that “in common parlance, 'residential dwelling' means any building, structure, or part of the building… that is used or intended to be used as a home, residence, or sleeping place” by persons maintaining a household. It clarified that any residential accommodation intended for long-term stay falls within this category. On this basis, the bench held that the premises in question were undeniably residential dwellings.

The Court then examined the crucial third requirement under Entry 13 - that the residential dwelling must be “given for use as a residence.” This condition had been the basis for the revenue's contention that the exemption did not apply because the lessee, being a company, was not using the premises as its own residence. The Supreme Court decisively rejected this interpretation.

"There is no further condition that the tenant or lessee must itself use it as a residence. Indeed M/s DTwelve Spaces Private Limited (lessee) is an aggregator who facilitates the use of residential dwelling for hostel accommodation. The third condition stood satisfied as M/s DTwelve Spaces Private Limited is the lessee and all the students/working women are none else but sub-lessees. It is well-settled that what is a lease between the owner of a property and a tenant becomes a sub-lease when it is entered into between the tenant and his sub-tenant," the judgment authored by Justice Pardiwala stated.

The Court went further to state that the revenue's argument amounted to inserting an additional condition into Entry 13, something courts cannot do. “Giving Entry 13 a narrow interpretation… would ultimately lead to the legislative intent being defeated,” the judgment warned. The purpose of the provision, the bench emphasised, is to ensure that residential use is not burdened with the 18 percent GST or IGST. The legislative design was clear: when a property is used as a residence, the rental service should fall outside the GST net.

"In the case on hand, the ultimate use of the property as residence remains unchanged. However, if 18% GST is levied on this transaction between the respondent No. 1 and the lessee i.e. M/s DTwelve Spaces Private Limited, the same would ultimately be passed on to the students and working professionals which would lead to a situation where the legislative intent behind granting exemption for residential use is defeated," the Court noted.

The Court drew support from the principle laid down in Union of India v. Wood Papers Ltd. (1990) 4 SCC 256, which holds that exemption notifications must be construed strictly at the threshold stage, but once the exemption applies, a liberal construction must be adopted.

"Entry 13 grants exemption from GST for renting of residential dwellings for use as residence. On a strict construction thereof, all the three requirements referred to above are satisfied. Once the exemption notification is applicable, it should be construed liberally. Thus, if the conditions are satisfied, the benefit should be available to both lessees and the sub- lessees as well," the judgment held.

The Court also pointed out that the exemption envisaged under Entry 13 is an activity-specific exemption and not person person-specific exemption.  Reference was also made to the judgment in Government of Kerala v. Mother Superior Adoration Convent reported in (2021) 5 SCC 602

Entry 18 amended in 2022

The judgment noted that Entry 18 was amended in 2022 to state that the exemption is not available where the residential dwelling is rented to a GST registered person. Thus, from 2022, no exemption can be claimed for the arrangement. However, the Court held that this amendment cannot be given retrospective effect.

Advocate V. Chandrashekara Bharathi appeared for the revenue.

Senior Advocate Arvind P Datar appeared for the respondent.

Case : The State of Karnataka v Taghar Vasudeva Ambrish

Citation : 2025 LiveLaw (SC) 1167

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