By CA Surekha S. Ahuja
Reference: Supreme Court judgment, State of Karnataka & Anr. vs. Taghar Vasudeva Ambrish, 04.12.2025
The Supreme Court’s 2025 ruling provides clarity that residential premises leased to aggregators, co-living operators, or corporates remain GST-exempt under Entry 13, Notification 9/2017-IT(R), provided the ultimate use is residential.
This professional advisory outlines strategic business model adjustments, lease agreement updates, service segregation practices, and operational safeguards to lawfully preserve GST exemption, avoid defaults, and remain scrutiny-ready.
Strategic Business Model Alignment
| Focus Area | Recommended Action | Professional Implication |
|---|---|---|
| Property Segmentation | Separate residential (exempt) and commercial/hospitality (taxable) properties; consider distinct legal entities or cost centers | Ensures correct GST classification; audit-ready reporting |
| Revenue Segregation | Exempt: long-term residential rent; Taxable: ancillary services (mess, housekeeping, laundry, utilities); avoid bundling | Prevents inadvertent GST liability on exempt rent |
| Occupancy Verification | Maintain occupancy logs, tenant certifications, sub-leasing records; conduct quarterly internal audits | Supports SC-compliant residential use; strengthens scrutiny defense |
| Aggregator/Corporate Lease | Sub-leasing allowed only for residential purposes; define reporting obligations and audit rights | Preserves exemption eligibility despite corporate tenancy |
Lease Agreement Clause Differentiators
| Clause | Updated Wording / Differentiator | Rationale / Safeguard |
|---|---|---|
| Purpose / Use | “Premises shall be used exclusively for long-term residential accommodation, including student housing, co-living, or employee residences. Commercial or non-residential use is strictly prohibited.” | Ensures SC-compliant residential use |
| Sub-Leasing | “Sub-leasing permitted solely for residential purposes. Lessor may inspect sub-leasing records quarterly. Commercial or transient sub-leasing constitutes material breach.” | Maintains GST exemption even with intermediaries |
| Occupancy / Duration | “Minimum stay of three months. Daily/weekly occupancy prohibited. Lessor may verify occupancy logs quarterly.” | Differentiates from taxable hospitality services |
| Service Segregation | “Rent pertains exclusively to residential lease. Ancillary services (mess, housekeeping, laundry, utilities) shall be invoiced separately and are taxable. Bundling of taxable services with rent is prohibited. Allocation methodology to be applied if partial services included.” | Ensures audit-ready invoicing and prevents GST on exempt rent |
| Exemption & Legal Reference | “Lease qualifies for GST exemption under Entry 13, Notification 9/2017-IT(R), as affirmed by SC judgment dated 04.12.2025. Exemption is based on functional residential use, irrespective of lessee identity.” | Provides legal backing for scrutiny |
| Termination & Breach | “Material breaches include non-residential use, short-term occupancy (<3 months), bundling of taxable services, or sub-leasing violations. Remedies: termination, damages, invoice adjustment, indemnity claims.” | Protects lessor and operational compliance |
| Compliance & Reporting | “Tenant shall certify end-use quarterly. Lessor may inspect occupancy logs, sub-leasing agreements, and ancillary service invoicing. Internal audits to reconcile agreements, occupancy, and GST returns conducted quarterly.” | Ensures continued GST exemption eligibility |
Bundled vs. Unbundled Services Matrix
| Scenario | GST Treatment | Advisory Notes |
|---|---|---|
| Rent only | Exempt | Maintain minimum stay and occupancy logs |
| Rent + ancillary services bundled | Taxable on services portion | Must unbundle and invoice separately; define in lease |
| Utilities included in rent | Partial risk | Allocate or clarify as exempt in agreement |
| Commercial / hospitality operations | Fully taxable | Consider separate legal entity or cost center |
| Short-term stays (<3 months) | Fully taxable | Exclude from residential leasing operations |
Procedural & Operational Safeguards
| Area | Key Safeguard / Advisory |
|---|---|
| GST Returns | Report exempt rent as nil-rated; taxable services separately invoiced and returned |
| Documentation | Maintain lease agreements, sub-leases, occupancy logs, payment receipts, bank statements; historical occupancy logs for audit defense |
| Internal Audit | Quarterly verification of agreements, occupancy, invoicing, and GST returns |
| Revenue & Entity Segregation | Separate ledgers for exempt rent vs taxable services; split invoices if bundling unavoidable |
| Tenant / Aggregator Controls | Reporting obligations, audit rights, compliance indemnity clauses |
| Compliance Evidence | Periodic tenant certifications, occupancy logs, sub-leasing documentation |
Risk Mitigation & Caution Points
| Risk | Preventive Action / Clause |
|---|---|
| Short-term occupancy | Minimum stay clauses; occupancy monitoring & certification |
| Bundled services | Explicit prohibition in agreement; separate invoicing |
| Mixed-use properties | Separate entities or cost centers; segregate GST returns |
| Aggregator/corporate tenant non-compliance | Indemnity clause; reporting obligations; inspection rights |
| Documentation gaps | Comprehensive lease, sub-lease, occupancy, and payment record maintenance |
| Scrutiny challenges | Explicitly reference SC judgment, High Court rulings, and Entry 13 |
| Operational misalignment | Internal audits to reconcile agreements, occupancy, invoicing, GST returns |
Key Takeaways
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GST exemption depends on functional residential use, not the legal identity of the lessee.
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Precise clause drafting is critical: sub-leasing, occupancy, service segregation, breach triggers.
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Operational and legal segregation between residential and commercial activities is mandatory.
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Separate invoicing for taxable and exempt components prevents inadvertent GST liability.
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Quarterly verification, tenant certification, and internal audits are essential safeguards.
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Explicit breach remedies protect lessors and maintain compliance under scrutiny.
Conclusion
Integrating business model alignment, updated audit-proof lease clauses, service unbundling, and operational safeguards ensures:
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Lawful GST exemption for residential leasing and co-living operations
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Minimized default and scrutiny risk
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Professional, audit-ready documentation and operational clarity for aggregators, corporate tenants, and property owners
This forms a complete professional framework for GST-compliant residential leasing, student housing, and co-living operations.
