GST Exemption on Renting Residential Dwellings for Hostel Use: What the Supreme Court Decided
The question of whether GST exemption applies when a residential property is leased to a company that subsequently operates it as a hostel for students and working professionals has been a matter of significant legal debate. The Supreme Court has now settled this controversy, ruling in favour of the assessee and holding that residential properties let out for residential use — even through an intermediate lessee — remain exempt from GST. This article unpacks the legal framework, judicial reasoning, and practical implications of this ruling.
Legal Foundation: Exemption under Entry 12 of Notification No. 12/2017-CTR
The GST exemption at the heart of this dispute originates from Entry 12 of Notification No. 12/2017-Central Tax (Rate), issued by the Government of India under Section 11 of the Central Goods and Services Tax Act. The said entry exempts:
"Services by way of renting of residential dwelling for use as residence."
Section 11 of the GST Act empowers the government, where satisfied that public interest so requires and upon recommendation of the GST Council, to grant exemptions — either absolute or conditional — through official notification.
A straightforward reading of Entry 12 reveals that this is a supply-specific or activity-specific exemption, not a supplier-specific or recipient-specific one. Three essential conditions emerge from this entry:
- There must be a supply of services in the form of renting
- The property being rented must qualify as a residential dwelling
- The residential dwelling must be used as a residence
Critically, the entry does not prescribe who the supplier must be, nor does it restrict the identity of the recipient. The nature of the activity and the end use of the property are the determining factors.
Understanding GST Exemption Categories
Before examining the facts of the case, it is important to understand the three broad categories into which GST exemptions can be classified:
- Supplier-Specific Exemption: Available only to certain types of suppliers listed in the exemption schedule
- Supply-Specific Exemption: Available to any supplier engaged in a specifically identified supply, irrespective of who the parties are
- Recipient-Specific Exemption: Granted based on who the ultimate recipient of the supply is
Entry 12 of Notification No. 12/2017-CTR clearly falls within the supply-specific category, since neither the identity of the lessor nor the lessee is made a condition for the exemption. What matters is whether the property qualifies as a residential dwelling and whether it is being used for residential purposes.
Jurisprudential Framework on Exemption Notifications
Courts have over time developed a nuanced body of law on how exemption notifications under tax statutes must be interpreted. The following principles are particularly relevant:
Strict Interpretation at the Threshold
In Dilip Kumar and Company v. Commissioner of Customs (Import) Mumbai [2018-TIOL-302-SC-CUS-CB], the Supreme Court laid down that where ambiguity exists in an exemption notification, the benefit of such ambiguity cannot be claimed by the assessee — it must be resolved in favour of the revenue department.
Purposive Interpretation for Beneficial Exemptions
However, in Government of Kerala & Anr. v. Mother Superior Adoration Convent [2021 SCC Online SC 151]: TS-131-SC-2021-NT, the Supreme Court clarified that the objective behind an exemption must be considered rather than adopting a rigid literal reading — especially where the exemption serves a beneficial social or economic purpose.
The ratio in Dilip Kumar and Company applies only to general exemptions in taxing statutes. Where the exemption promotes economic growth or carries a beneficial legislative purpose, purposive interpretation must prevail.