Electricity charges if bundled with rent or maintenance fee by real estate companies, malls or airports will be deemed to be a composite supply and attract goods and services tax (GST) at the rate of 18%. However, in case electricity is supplied by the real estate owners, residents’ welfare associations or real estate developers, as a “pure agent” when the charge is on actual charged by state electricity board or discoms (distribution companies), it will not attract GST as a composite supply. 

The Central Board of Indirect Taxes and Customs (CBIC) has now issued a clarification on whether GST is applicable on reimbursement of electricity charges received by real estate companies, malls, airport operators from their lessees or occupants. “It is clarified that whenever electricity is being supplied bundled with renting of immovable property and or maintenance of premises, as the case may be, it forms a part of composite supply and shall be taxed accordingly. The principal supply is renting of immovable property and maintenance of premise, as the case may be, and the supply of electricity is an ancillary supply,” the CBIC has said. 

Even if electricity is billed separately, the supplies will constitute a composite supply and therefore, the rate of the principal supply that is the GST rate on renting of immovable property and maintenance of premise, as the case may be, would be applicable, it further said. 

According to experts, the tax would eventually have to be borne by the tenant and could impact rents and maintenance fee charged by the owner and deposited to the tax department. However, they noted that the clarification still leaves some uncertainty and has also raised significant concerns within the real estate sector. 

“This clarification imposes GST on electricity charges, whether supplied bundled with immovable property or separately though it does allow for exceptions when real estate owners act as pure agents or recover electricity charges on actual basis,” said Saurabh Agarwal, EY Partner. 

In cases where real estate companies convert high tension lines to low tension lines and charge higher rates due to transmission loss, the implications of this clarification remain a point of concern, he however noted, adding that it may lead to an increase in the rental cost, as landlords may factor the GST cost on electricity when determining lease rental amounts. 

“The said clarification also aligns with the West Bengal Advance Ruling on Airports Authority of India, which deemed the supply of electricity as part of a composite supply,” Agarwal said, while cautioning that it provides the tax department with a basis to address previous issues and potentially issue new notices to landlords who have not charged GST on electricity reimbursements. 

Prateek Bansal, Tax Partner, White and Brief–Advocates & Solicitors pointed out that typically, the reimbursement of electricity charges is coupled with some principal supply of service, whether renting or maintenance service, as the case may be. “While the circular has carved out an exception in case of ‘pure agent’ where the reimbursement is collected at actuals, it will be difficult to establish non-existence of a principal supply as a person cannot be considered to solely act as ‘pure agent’ for the purpose of collecting and discharging electricity charges,” he said. However, to take shelter under the exclusion, the businesses may obtain an authorisation from the actual consumer of electricity to act as its “pure agent” and to make payment to third parties on its behalf.