Accommodation costs for students are set to increase as a 12 percent GST will now be applied to rent payments for hostel accommodations and by paying guests, as per the recent order issued by Advance Rulings in Karnataka.

In two distinct rulings, the Uttar Pradesh and Karnataka Authority of Advance Rulings’ (AAR) have classified these accommodations as ‘non-residential,’ making them liable for 12 percent GST, similar to small hotels and inns.

The Bengaluru bench of the AAR has clarified that hostels are not considered residential dwelling units and, as a result, are not exempt from Goods and Services Tax (GST).

The AAR’s ruling was in response to an inquiry from Srisai Luxurious Stay LLP. Additionally, the AAR stated that accommodation services offered by hotels, clubs, campsites, etc., with charges up to Rs 1,000/- per day, were eligible for GST exemption until July 17, 2022.

“PG/Hostel Rent paid by inhabitants do not qualify for GST exemption as the services provided by applicant are not akin to renting of residential dwelling for use as residence,” the Bengaluru bench said.

It is essential to highlight that no GST is applicable if a house is rented for residential purposes by individuals who are not required to register for GST.

The AAR also observed that the additional services offered by the LLP are not inherently bundled with the applicant’s hostel or paying guest accommodation service.

“Residential dwelling is a residential accommodation meant for permanent stay and does not include guest house, lodge or like places. In the instant case, the applicant in his own admission claims to be providing PG/hostel services which inter alia refer to ‘paying guest accommodation / hostel’ services and are akin to guest house and lodging services and therefore can’t be termed as residential dwelling’,” the order said.

The Lucknow bench of the AAR ruled that GST would be applicable to hostel accommodations costing less than Rs 1,000 per day, in a similar case referred by Noida-based V S Institute & Hostel Pvt Ltd.

“Hence, from July 18, 2022, onward services provided by an applicant will be (covered under GST for taxation),” the Lucknow bench AAR said.

Tax experts predict that the rulings issued by the Karnataka and UP AARs will be considered ‘permanent precedents’ by the GST council and that the absence of PGs and hostels from the GST law created a loophole.

“There was confusion regarding the GST levied on PGs and hostels. Many were not paying any GST, while some charged 5 percent, others 18 percent, and some had no tax at all. This ruling provides clarity, stating a 12 percent GST rate. The immediate impact will be on students residing in these PGs and hostels, as the cost of education is expected to increase,” Sharad Kohli, a tax expert based in Delhi told CNBC.

Rent Burden on Students

The ruling could result in increased living costs for out-station students, directly impacting the overall cost of education. However, some tax experts view the orders as obtuse and potentially subject to challenge.

Ranjeet Mahtani, Partner at Dhruva Advisors told the channel that according to certain high court decisions, a hostel qualifies as a residential dwelling, making it eligible for exemption. The AAR’s view on denying the residential dwelling status to hostels and exemption seems unreasonable and obtuse, leaving room for potential challenges, he stated.

Rajat Mohan, Senior Partner at AMRG & Associates told PTI the 12 percent tax on student accommodation in hostels and dormitories could result in higher costs for Indian families. He suggested that the GST council might contemplate making a policy decision to offset the tax burden across the entire education ecosystem, including student accommodation.

(With inputs from PTI)