Exemption Depends on Use, Not the User: Supreme Court Clarifies GST Relief for Residential Rentals to Companies Sub-Leasing as Hostels

“Entry 13 Does Not Mandate Lessee Must Personally Reside”, In a landmark decision that will shape the GST regime governing rental transactions, the Supreme Court definitively ruled that leasing a residential property to a company, which in turn sub-lets it as hostel accommodation to students and working professionals, qualifies for GST exemption under Entry 13 of Notification No. 9/2017.

The Court made it clear that what matters under the law is the use of the property as residence, not whether the lessee personally resides there. Justice J.B. Pardiwala, writing for the Bench also comprising Justice K.V. Viswanathan, observed emphatically: “There is no further condition that the tenant or lessee must itself use it as a residence… Entry 13 does not mandate that the lessee must use the residential dwelling as its own residence.”

This ruling reinforces the purposive interpretation of beneficial tax exemptions under GST and sets aside the restrictive reading adopted by the Revenue Authorities and the Karnataka Authority for Advance Ruling (AAR) and the Appellate Authority for Advance Ruling (AAAR), both of which had denied the exemption.

“Residential Dwelling” Includes Hostels for Long Stay: Supreme Court Applies Common Parlance Test and Settled Precedents

The dispute revolved around whether a four-storied residential building in Bangalore, comprising 42 rooms and let out by the respondent landlord to M/s DTwelve Spaces Pvt Ltd for sub-letting as hostel accommodation, could still be considered a “residential dwelling” eligible for GST exemption under Entry 13. The AAR and AAAR had taken a rigid view, holding that the nature of hostel accommodation and the identity of the lessee (a company) made it ineligible.

Rejecting this contention, the Supreme Court held that “any residential accommodation meant for long term stay can be referred to as ‘residential dwelling’”, and noted that neither the GST Act nor the Notification define the term. Relying on the Education Guide issued by CBIC under the erstwhile Service Tax regime, the Court clarified:

“The phrase ‘residential dwelling’ has not been defined in the Act. It has therefore to be interpreted in terms of the normal trade parlance as per which it is any residential accommodation, but does not include hotel, motel, inn, guest house, camp-site, lodge, house boat, or like places meant for temporary stay.”

Drawing from the Bombay High Court’s ruling in Bandu Ravji Nikam, where hostel use by students was held to be residential in nature, the Court observed, “Hostel is a house of residence or lodging for students… just because the hostel owners charge some amount from the students, such accommodation cannot be treated as commercial or non-residential.”

The Court held that the building retained its residential character, especially since it was used by students and working women for long-term stays between 3 to 12 months.

“GST Exemption Under Entry 13 Is Not Person-Specific, It Is Activity-Specific”: Court Rejects Revenue’s Transactional Argument

The Revenue had contended that exemption under Entry 13 could apply only when the lessee personally uses the property as residence, and that the Court must confine its analysis to the “first transaction” between the landlord and the lessee, not subsequent sub-leases. The Court dismissed this approach as untenable.

Justice Pardiwala categorically held: “We are not impressed by the submission… that since the lessee did not use the hostel as a residence but rather sub-leased the same to students/working women, such transaction does not fall within Entry 13.”

He further stated, “Giving any other interpretation would mean adding an additional condition to Entry 13.”

Reinforcing this view, the judgment clarified that the GST exemption under Entry 13 is an “activity-specific exemption” and not a “person-specific exemption”. The Court drew a contrast with other entries under GST law that are specifically person-linked, such as Entry 1 (relating to charitable entities) or Entry 26 (electricity utilities), concluding that Entry 13 does not impose any such qualification.

“Legislative Intent Would Be Defeated If Tax Burden Shifts to Students and Working Women”: Supreme Court Warns Against Over-Taxation

A critical factor influencing the Court’s reasoning was the consequence of taxing the transaction between landlord and lessee—namely, that the 18% GST would ultimately be passed on to students and working professionals. The Court warned that such an interpretation would “defeat the legislative intent” of providing relief for residential usage.

In poignant terms, the Court explained, “The ultimate use of the property as residence remains unchanged. However, if 18% GST is levied… 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.”

The Court adopted a purposive interpretation of Entry 13, citing Mother Superior Adoration Convent v. Government of Kerala (2021) and Wood Papers Ltd. (1990), reiterating that beneficial exemptions must be construed liberally once the conditions for their applicability are met.

“Purposive Interpretation Triumphs Over Literal Rigidity”: Apex Court Endorses Welfare-Oriented Reading of Exemption Laws

The Court reinforced a broader jurisprudential principle—that statutory interpretation, particularly of tax exemptions with welfare objectives, must adopt a purposive, dynamic, and common-sense approach. Referring to Justice Aharon Barak’s work on purposive interpretation, the Bench observed:

“We must first ask ourselves what is the object sought to be achieved by the provision and construe the statute in accord with such object.”

It emphasized that while exemption provisions must be strictly construed at the threshold, once it is shown that the case falls within the exemption, a liberal and purposive construction must follow.

Thus, the Court concluded that “strict construction applies to eligibility, not to the application of the exemption once eligibility is established.”

2022 Amendments Have No Retrospective Effect: Court Rejects Revenue’s Attempt To Rewrite Past

The Revenue had attempted to invoke the post-July 18, 2022, amendment to Entry 13, which excluded exemption where residential dwellings are rented to registered persons. The Court squarely rejected this argument, holding that the exemption law as it stood from 2019 to 2022 clearly covered the transaction in question.

The Bench observed:

“Through these appeals, the revenue is, in effect, trying to give retrospective application to the amendment made in 2022, which is impermissible.”

The Court also referred to the Explanation added on 01.01.2023, which clarified that exemption can still apply to a registered person who rents a dwelling for personal residential use. According to the Court, “the Explanation clearly shows that the intention from the beginning was to ensure that rental agreements for use of the property for residential purposes are granted exemption from GST.”

Supreme Court Upholds High Court’s Reasoning, Dismisses State’s Appeals

Upholding the Karnataka High Court’s decision dated 07.02.2022, the Supreme Court found no merit in the appeals filed by the State. It endorsed the High Court’s correct application of legal principles and interpretation of Entry 13.

In conclusion, the Court held:

“For the period 2019-2022, all the three conditions of Entry No.13 stood complied with… We have reached the conclusion that we should not interfere with the impugned judgment and order passed by the High Court. As a result, both the appeals fail and are hereby dismissed.”

Date of Decision: 04 December 2025