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

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.