New Delhi: In a move that could come as a breather for companies and even corporate individuals, an Authority for Advance Ruling (AAR) has permitted tax credit on goods and services tax (GST) paid on upfront lease premium. Until now, this was disallowed. 

Tamil Nadu AAR in a ruling on July 27 had said, "The upfront premium made is the lease rentals as per the allotment order/letter of Chennai Port Trusts and it is nothing but lease rentals paid for the services of 'renting of immovable property' for business purposes.” 

The upfront premium paid is not related to construction activity of such covered space but against the rental value for the period of rent calculated for the period of lease and collected upfront, the judgement said adding that input tax credit should be allowed on this upfront payment of rent. 

Input tax credit is a mechanism under GST where part of the tax paid can be set off against future tax liability. 

This ruling from the AAR assumes significance as it would encourage many tenants to challenge the taxman's stance, according to experts. Input tax credit is generally not permitted by tax authorities on the ground that same is in relation to immovable property, hence restricted. 

Where tenants undertake some renovation or construction work before they use the property, the credit is denied on the logic of input service of lease being used for construction, Harpreet Singh, partner at KPMG India, told Economic Times. 

The tax authorities also argue that since no input tax credit is allowed in any real estate deal the same principal should apply to lease premiums, in disallowing it. 

GST is paid on the lease premium, which is an amount agreed upon in most cases. 

The AAR ruling is important as it will help open a new interpretation for many companies that have paid GST on such a premium and may try to avail tax credit, tax experts opined. "This is a positive ruling which has given due weightage to the nature of input service being incurred and its use in business to determine the credit eligibility," Singh said. 

Meanwhile, GST in the real estate sector is now also applied to apartments rented by companies for senior executives. During the 47th GST Council meeting, it was recommended that 18 per cent GST be levied on such rent. Hence, renting an apartment by a registered entity now attracts an 18 per cent GST.