Supreme Court Upholds GST Exemption On Renting Residential Premises As Hostels To Students & Professionals

Appeals were filed assailing the judgment passed by the Karnataka High Court, wherein the High Court set aside the order passed by the Appellate Authority for Advance Ruling, Karnataka (“the AAAR”), which ruled that leasing residential premises as hostels to students and working professionals does not qualify for exemption, denying the exemption for renting residential dwellings used as residences.

The Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan observed, “The legislative intent behind this exemption clause is that a rented property, that is used as residence should not suffer 18% GST or IGST. However, if Entry 13 is given such a narrow interpretation, then, exemption will not be available in cases where a lessee has sub-leased the property for use as residence…In the present matter, the ultimate use of the property remained unchanged. In other words, it remained as ‘use for residence’ by students/working women. However, if 18% GST is levied on this transaction between the respondent No. 1 and the lessee, the same will be passed on to the students and working professionals which would ultimately lead to a situation where legislative intent behind granting exemption for residential use is defeated.”

AAG Nishanth Patil appeared on behalf of the Appellants, whereas Senior Advocate Arvind P Datar and Advocate V. Chandrashekara Bharathi appeared on behalf of the Respondents.

Factual Background of the Case

Respondent No. 1, co-owner of a 42-room, four-storied residential building in Bangalore (with terrace and common areas), along with other co-owners, executed a lease deed in favour of one M/s DTwelve Spaces Private Limited. The lessee sub-leased it as a hostel providing long-term accommodation (3-12 months) to students and working professionals. Seeking clarification on GST exemption eligibility under Entry 13 of Notification No. 9/2017-Integrated Tax (Rate) dated 28.06.2017 (exempting renting of residential dwellings for use as residence), Respondent No. 1 filed an Advance Ruling application under Section 97 of the IGST Act, 2017, before the Authority for Advance Ruling, Karnataka (“AAR”).

The AAR held that the services did not qualify, as the corporate lessee was not using the premises residentially, requiring GST on invoices to the registered lessee. The AAAR affirmed this on 31.08.2020 under Section 100, deeming the hostel “sociable accommodation” rather than standard residential use, available only if the direct lessee used it as a residence, dismissing the appeal.

Respondent No. 1 challenged this via Writ Petition before the Karnataka High Court, which allowed the writ, holding that Entry 13 is clear and unambiguous. It said that “residential dwelling” as per the Central Board of Indirect Taxes and Customs (‘CBIC’) guide dated 20.06.2012 (any residential accommodation excluding short-stay hotels/guest houses) is binding, and hostels for longer stays qualify.

Contention of the Parties

Revenue’s Arguments

Counsel for the State’s Revenue Department argued that the High Court erred in granting GST exemption under Entry 13 of Notification No. 9/2017 to the lessor-lessee transaction. He submitted that three conjunctive conditions must be met: (a) renting service supply, (b) of a residential dwelling, (c) used as residence. He also said that lease clauses show DTwelve Spaces Pvt. Ltd. took the 42-room property for commercial sub-leasing to students/professionals, not personal residence, failing condition no. (c). Exemption is supply-specific under Sections 7/9 IGST Act; sub-lessees' use cannot be imported. Property fails "residential dwelling" test per CBIC Education Guide (para 4.13.1), resembling excluded hotels/guest houses. Distinguished Mother Superior (2021) 5 SCC 602 as inapplicable to profit-driven leases, he further added.

Respondent’s Arguments

Respondent countered that there is no error in the High Court ruling. He said that co-owners leased to DTwelve (aggregator for student/professional hostels, avg. 8-month stays) on 16.06.2019; total rent June 2019-June 2022: ₹1.12 crore (potential 18% IGST: ₹20.23 lakh, paid post-18.07.2022 amendment). All three conditions met: renting residential property for residence use; no mandate for lessee's personal occupancy—rewriting Entry 13 otherwise defeats intent. High Court's view aligns with the law, warranting no Article 136 interference, he added.

Findings of the Court

The main question of law before the Court was whether the amount at the rate of 18% is payable on the rental amount paid by the lessee to the Respondent No. 1. The Court considered the definition and meaning of ‘residential dwelling’ and observed, “Further in common parlance, ‘residential dwelling’ means any building, structure, or part of the building or structure other than offices or factories, that is used or intended to be used as a home, residence, or sleeping place by one person or by two or more persons maintaining a common household, to the exclusion of all others…Thus, any residential accommodation meant for long term stay can be referred to as “residential dwelling”. The materials on record further indicate that as per the Khatha Extract and layout plans and records available with the Bruhat Bangalore Mahanagara Palike, the plot and property is shown as residential in nature. In view of the aforesaid, we have no hesitation in reaching the conclusion that the subject property is a “residential dwelling”.”

The Court said that the ultimate use of the property as a 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, it added.

Further, the Court discussed the purposive interpretation of Entry 13. It gave Entry 13 a narrow interpretation by holding that it is available only when the property so rented is used by the service recipient themselves would ultimately lead to legislative intent being defeated as the exemption is extended to cases wherein a residential dwelling is rented out and ultimately used as a residence, irrespective of the person using it.

The Court also observed, “In addition to above, it is pertinent to note that exemption envisaged under Entry 13 is an activity specific exemption and not person specific exemption. There are many exemptions given under GST law which are person specific exemptions and are applicable only when service provider or recipient is among the notified category of persons. On the other hand, there are many exemptions which are activity specific exemptions whereby an activity is given an exemption, and such exemptions are not dependent on the person using the service that is exempt…For instance, under Entry 1, exemption is provided to services by an entity registered under section 12AA of the Income-tax Act, 1961 by way of charitable activities. Here, exemption is provided only if charitable activities are provided by an entity registered under Section 12AA of the Income Tax Act. Entry 26 is another example which provides exemption to transmission or distribution of electricity by an electricity transmission or distribution utility.”

Conclusion

The Court concluded that there will be no exemption available for Respondent 1, as he has rented to a registered person. It held that the Explanation clearly shows that even if the rent is paid by a registered person, the exemption will be available if it is used for the purpose of own residence and is rented in the personal capacity. Therefore, the intention from the beginning was to ensure that rental agreements for the use of the property for residential purposes are granted exemption from GST.

Accordingly, the Court refused to interfere with the Impugned Judgment and dismissed the Appeals.

Cause Title: The State of Karnataka & Anr. v. Taghar Vasudeva Ambrish & Anr. [Neutral Citation: 2025 INSC 1380]

Appearances:

Appellants: AAG Nishanth Patil, AORs Sanchit Garga and Mukesh Kumar Maroria, Advocates Bhumi Agarwal, Awanish Gupta and Arijit Dey.

Respondents: Senior Advocate Arvind P Datar, AORs M/s.K J John And Co, Gurmeet Singh Makker, Advocates Surekha Raman, Amarjit Singh Bedi, Rahul Unnikrishnan, Shreyash Kumar, Yashwant Sanjenbam, Sidharth Nair and Harshit Singh, V.C. Bharathi, Anmol Chandan, Suyash Pandey and Aditya Archiya.

Click here to read/download the Judgment.