Analyzing GST challenges and suggesting taxation support for the Professionally Managed Student Accommodation (PMSA) industry for a swift post-pandemic recovery

New Delhi, 16th December 2020: The ongoing COVID-19 pandemic has had a devastating effect on the student housing industry. With the nationwide closure of all educational institutions across the country, occupancy rates in privately managed student housing facilities has nosedived with students having left for their hometowns in Tier II and III cities. In order to ensure that returning students are safe and the

industry can stage a recovery to pre-pandemic occupancy levels quickly, professionally managed student accommodation (PMSA) operators have been doubling down on safety measures such as regular cleaning, sanitization and disinfection of their premises.

The pandemic struck at a time when the industry had been experiencing nascent success and significant global investor interest with PMSA operators admirably filling the demand gap for student housing in

India. With students likely to return to higher education institutions by March 2021, PMSA housing serves are perhaps the most secure form of accommodation given higher quality hygiene standards and services.

Government support alongside returning occupants will help the industry achieve renewed success over the next fiscal. Specifically, addressing the ambiguous and often high rate of Goods and Services Tax (GST)

imposition is one key industry concern which the government could prioritize to support PMSA operators over the short term.

In this context, the Shared Accommodation Providers Forum of India (SAPFI) in collaboration with commercial real estate services firm Cushman & Wakefield (C&W) have launched their insight paper titled ‘GST & Student Housing: Analyzing Tax Implications for A High Growth Industry’ on December 15th.

The paper attempts to provide an analysis on the implications of GST imposition across varied student housing business models and the rationale for a lower GST rate. Addressing some of the challenges highlighted in the analysis will provide an impetus to the nascent industry and make quality housing more affordable for students. The report with its directional suggestions to the central and state authorities, aims at providing recommendations for a higher degree of “Ease of Doing Business” for the emerging student housing industry.

“The pandemic has adversely impacted the nascent PMSA industry which was a bright spot among real estate asset classes in recent years. Our operator members are expecting peak in demand for 2021, especially with the changing consumer preference toward safe and secure accommodation along with strict hygiene protocol. The sector has the potential to create startup unicorns which will contribute to

government’s vision for the startup community to build economy and society. But this requires support from the government in the form of sectoral categorization of the sector and an industry-friendly taxation structure,” said Kaushal Mahan, Convener, SAPFI.

Rohan Sharma, Director, Research Services, C&W India, who is also the lead author of the report said, “With its growth potential, the PMSA sector can do with all the regulatory and policy support it can get. While in the first instance, clarity on the GST imposition would be extremely helpful, our analysis also shows that there are distinctly positive potential impacts whilst considering the rationale for lower GST rates for this asset class. As a sub-segment of the rental accommodation sector, recognition under the Model Tenancy Act as a distinct asset class and being allowed to operate purely on market dynamics would create long-term stakeholder value for the sector. We believe a collaborative approach between the private operators and the government would make this a win-win situation and allow the PMSA industry to realize its true potential.”

Key highlights:

• Along with its primary objective of enhancing the education experience of migrant students, the student housing industry also facilitates the generation of employment opportunities across multiple sub-sectors.

• The industry, which has recorded a rapid growth momentum with 25+ startups operating across 26 Tier 1 and Tier 2 cities, will receive a further boost in operational expansion with a lower single rate of taxation.

• Currently, while varying GST rates are applicable on operations across different Student Housing business models, exemptions and applicability differ as well. For example, in a ‘management contract’, GST is exempted for unit rent under INR1,000/day while GST is paid by a Student Housing provider to the property owner at 18% on property management services. A ‘pure lease model’ sees a property owner paying GST at 18% on rental income from commercial use of property that exceeds INR 20 lakh per annum while GST is exempted on accommodation services provided by a Student Housing operator to the tenant.

• Furthermore, with GST being applicable at varying rates on allied services that are offered with the accommodation unit, the tax burden has to be borne by the students.

• The study also highlights the ambiguous applicability of Clause 1 and 2a/2b of Schedule II of the CGST Act, 2017 on the Student Housing sector and the importance of a clarification on the status granted to the sector in terms of exemptions.

• The paper also undertakes a qualitative assessment of the implication of a uniform 5% vs 18% GST rate imposition and highlights the future growth prospects associated with a lower tax rate.

Click here to access the report.