INDIA Law and Practice Contributed by: Vivek Chandy, Archana Tewary, Kumarmanglam Vijay and Brijita Prakash, JSA
6.7 Payment of VAT VAT has been subsumed by GST, which is pay - able on leases of property/assets for commer - cial use and is borne by the tenant. Tenants can claim input tax credit, subject to conditions, on such tax paid. Also, tax on lease rent is deducted at source, as per the Income Tax Act 1961, by the tenant prior to paying rent to the landlord. 6.8 Costs Payable by a Tenant at the Start of a Lease In most commercial leases, a tenant is required to pay the landlord an interest-free refundable security deposit (IFRSD), held by the landlord as security for the tenant’s obligations during the lease term. The quantum of IFRSD is commer - cially agreed, but the practice differs from state to state and it can vary between three and 12 months’ rent. 6.9 Payment of Maintenance and Repair In addition to rent, tenants usually pay main - tenance and parking charges. The landlord is generally responsible for maintenance and repair of common areas, the cost of which is charged back to tenants on a fixed-cost basis (with an agreed escalation) or on actual cost-plus basis, with the landlord receiving a management fee of 15%-20% of the cost incurred in providing the services. All such payments (other than municipal taxes borne by the tenant) made to the landlord for use of the property are subject to withholding tax and GST. Any IFRSD is subject to the deduction of tax at source as rent. 6.10 Payment of Utilities and Telecommunications Utilities (including power, back-up power, water) are paid by each tenant of the building based on
actuals. Some landlords charge a mark-up for services such as diesel generators. 6.11 Payment of Property Taxes Typically, lessors are responsible for payment of property taxes except where the lessees take the land on lease and construct the building. In some cities, landlords require the tenant to bear property taxes under contracts. 6.12 Insurance Issues Generally, landlords obtain a fire and perils policy covering loss of property. The cost of insurance is sometimes charged back to tenants as part of the maintenance charges. Business interruption (BI) insurance is not sold standalone and can be taken only in conjunction with fire insurance/machinery/boiler explosion policy or as part of a package in products such as industrial all-risk insurance. It offers protec - tion to the net profit, standing charges and an increase in the cost of working to maintain nor - mal output/turnover. The COVID-19 pandemic and consequent lock - down orders would not have triggered payments under such BI policies because they did not result in physical damage to the insured prop - erty. The Supreme Court of India has consistently held that when interpreting insurance contracts, the terms of the policy will govern the contract between the parties and courts cannot interfere. Thus, it is unlikely that courts would interpret BI policies to cover the COVID-19 pandemic or lockdown, unless such situations are specifically covered by the policy.
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