By CA Surekha Ahuja
Why RCM Becomes a Cost at 5% and a Credit at 12% / 18%
Accommodation businesses across India increasingly operate from residential buildings taken on rent from unregistered individuals, converting them into hotels, hostels, PGs, guest houses and service apartments.
While outward GST at 5% on room tariff appears simple and attractive, the GST paid under reverse charge on rent often emerges as a silent margin killer.
This article explains the current position under GST law, the interplay of Sections 9, 16 and 17, the relevant rate and RCM notifications, and finally, the lawful tax-planning levers available to such businesses.
Substance Over Structure: Why This Is Not “Residential Renting”
GST law looks at use, not architectural design.
Even if the property is residential in nature, once it is used for:
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short-term or transient stays,
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tariff-based accommodation,
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hotel, hostel, PG or guest-house operations,
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bundled services such as pantry, housekeeping or managed lodging,
the supply ceases to be “renting of residential dwelling for use as residence.”
Accordingly:
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the exemption under Notification 12/2017-CT (Rate) does not apply, and
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the rent becomes a taxable supply, ordinarily liable to GST at 18%.
This position has been consistently reinforced through CBIC clarifications and sectoral understanding.
Section takeaway:
A residential building used commercially is taxed commercially.
Why Reverse Charge Applies on Such Rent
Under Section 9(3) of the CGST Act, the Government may notify supplies on which GST is payable by the recipient.
Renting of immovable property by an unregistered person to a registered person has been notified under this provision through:
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Notification 13/2017-CT (Rate), and
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the later introduction of Entry 5AB, covering renting of any immovable property by unregistered persons to registered (non-composition) recipients.
Result:
Where a registered accommodation operator takes premises on rent from an unregistered landlord, GST @18% must be paid under RCM, irrespective of:
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the room tariff charged, or
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whether outward supplies are taxed at 5%, 12% or 18%.
RCM here is structural, not optional.
The Core Question: Is ITC of RCM Rent Available?
The answer depends entirely on the outward tax regime chosen.
A. Where Outward Accommodation Is Taxed at 5% Without ITC
Accommodation services taxed at 5% are subject to a decisive condition in the rate notification:
“Provided that credit of input tax charged on goods and services used in supplying the service has not been taken.”
This condition has overriding effect.
Even though:
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Section 16 generally allows ITC of tax paid under reverse charge, and
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rent is clearly used in the course or furtherance of business,
the concessional rate itself contractually blocks ITC.
Consequences
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GST paid under RCM on rent cannot be availed as ITC
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ITC on pantry, housekeeping, security, repairs, etc. is also blocked
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RCM becomes a pure cost, not a credit
Section takeaway:
At 5%, GST simplicity comes at the cost of credit denial.
B. Where Outward Accommodation Is Taxed at 12% or 18% With ITC
Once the concessional 5% option is not adopted:
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the “no-ITC” condition disappears,
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RCM tax on rent qualifies as input service, and
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ITC becomes available, subject to Sections 16 and 17.
There is no block under Section 17(5) for such rent when premises are used for taxable accommodation.
Here, RCM shifts from cash leakage to recoverable credit.
Section takeaway:
The same RCM tax behaves very differently under a regular rate regime.
Ancillary Services: No Separate Immunity
Ancillary services such as:
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pantry and catering,
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housekeeping,
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security,
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maintenance and facility management,
do not enjoy independent ITC treatment.
Their credit eligibility flows entirely from the outward accommodation rate:
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5% regime → no ITC on any inputs or services
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12% / 18% regime → ITC allowed, with proportionate reversal under Section 17 if required
Mandatory Compliance Under RCM
Where rent is paid to an unregistered landlord, statutory compliance is non-negotiable:
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Self-invoice under Section 31(3)(f)
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Payment voucher under Rule 52
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GST payment in cash
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Reporting in GSTR-3B
A lease agreement or rent receipt does not substitute self-invoicing.
Lawful Tax-Saving and Structuring Strategies
GST does not prohibit planning — it penalises ignorance.
The following strategies are lawful, defensible and audit-safe.
Periodic Review of 5% vs 12% Option
Remaining at 5% merely because it “looks cheaper” is often sub-optimal.
Where:
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rentals are high,
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operating inputs are significant, and
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business is stable rather than transient,
12% with ITC may yield a lower effective tax burden.
There is no statutory bar on switching options prospectively.
Segmentation of Distinct Business Lines
Where factually supported, separation of:
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accommodation,
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conference or training facilities,
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cafeteria services,
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events or banquet operations,
allows:
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accommodation at 5% (no ITC), and
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ancillary services at 18% with ITC,
with proportionate credit under Section 17.
Artificial splitting without operational independence should be avoided.
Contract Clarity With Landlords
Well-drafted agreements clearly distinguishing:
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rent,
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utilities,
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maintenance or reimbursements,
reduce valuation disputes under Section 15 and support correct tax treatment.
This is commercial clarity, not tax avoidance.
Cost Management Where ITC Is Blocked
Even under the 5% regime:
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vendor selection,
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GST-inclusive pricing,
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service consolidation,
can materially reduce embedded tax costs.
Preventive Compliance: The Cheapest Saving
Wrongful ITC claims under the 5% regime attract exposure under Section 73.
Best practices include:
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separate non-creditable ledgers,
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disabling auto-ITC capture for RCM rent,
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monthly pre-GSTR-3B reviews.
Final Position
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RCM on rent is unavoidable when property is used for commercial accommodation
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ITC depends entirely on the outward rate chosen
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At 5%, RCM is a sunk cost
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At 12% / 18%, RCM becomes a recoverable credit
In One Line
RCM always applies. ITC applies only if you consciously allow it.
GST efficiency in accommodation businesses is therefore a matter of design, not accident.
