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Finance ministry recently issued a circular and said that from now onwards any transfer of commercial rental space and business tenancy rights is liable to tax. The government said that such activity against consideration in the form of tenancy premium constitutes a “supply of service”, which is liable to Goods and Services Tax (GST).

The circular read, “Merely because a transaction or a supply involves execution of documents which may require registration and payment of registration fee and stamp duty, would not preclude them from the scope of supply of goods and services and from payment of GST,”

On the other hand, the release confirmed that residential renting is exempted from tax. It said the grant of tenancy rights is exempted in a residential dwelling for use as residence against tenancy premium or period rent or both.

The circular further said that services provided by the outgoing tenant by way of surrendering tenancy rights against consideration in form of a portion of tenancy premium is also liable to GST.

In Maharashtra, the transfer of tenancy rights against tenancy premium is known as pagadi. Under this system, the tenant acquires tenancy rights in the property against payment of tenancy premium.

The landlord may be the owner of the property but the possession of the same lies with the tenant. The tenant has to pay monthly rent to the landlord as long as he/she occupies the property. The tenant also usually has the option to sell the tenancy right of the respective property and in such a case has to share a percentage of the money with the owner, as laid down in their tenancy agreement. On the other hand, the landlord pays to tenant the prevailing tenancy premium to get the property vacated.