GST on Assignment of Leasehold Rights: Mapping the Emerging Legal Position

Introduction : The assignment of leasehold rights of the industrial plots has been a highly debatable issue under the Goods and Services Tax regime in India. Across India the State Industrial Development Corporation allots industrial plots through long-term leases, typically for 30 years or more rather than a sale. Generally two types of transactions arise from it; First, the primary allotment of the lease by the State Corporation and Second, the secondary assignment of the leaseholders rights by current leaseholder to a third entity usually for a lump-sum amount. These two transactions raises a question under the Central Goods and Services Tax Act, 2017 : Whether the transaction should be considered as a ‘supply of service’ and if it is, then in becomes taxable; or it is a transfer of an interest in immoveable property which makes it fall under the exception under the same Act and no tax is levied on it. This blog maps out the statutory status of the concerned transactions, traces the judicial position, impact on the industrial plots and contract review checklist.

Legal Provisions

The primary statute regarding this issue is Central Goods and Services Tax Act, 2017. Section 7(1)(a) defines ‘Supply’ and Schedule II mentions activities or transactions to be treated as supply of goods or supply of services and Para 2(a) of the same Schedule mentions ‘any lease, tenancy, easement, licence to occupy land is a supply of services’ and if both of them read together it maybe considered as the transfer of leasehold rights as a ‘service’ and the tax department have heavily relied on these provisions to levy GST on land-lease transactions.However, Section 7(2)(a) and Schedule III (activities or transactions which shall be treated neither as a supply of goods nor a supply of services) Para 5 read together excludes ‘sale of land’ from scope of supply entirely. This raises a primary question i.e. whether an assignment of leasehold rights is closer to a ‘lease/licence to occupy land’ taxable under Schedule II or a transfer of a ‘benefit arising out of the land’ akin to sale which is excluded under Schedule III

Entry 41 of Notification No. 12/2017-Central Tax (Rate) dated 28 June 2017 exempts GST on the upfront premium payable for a long-term lease (thirty years or more) of an industrial plot, where the lessor is a state government, a state industrial development corporation, or an entity with not less than twenty per cent government ownership. CBIC Circular No. 101/20/2019-GST confirms the exemption survives instalment payment, provided the amount is determined upfront. This exemption applies only to primary allotment by a qualifying corporation, not to a subsequent private assignment between non-governmental parties. State stamp duty legislation operates in parallel: assignment deeds attract stamp duty on transaction value under the applicable state Stamp Act.

Legal Analysis

The taxability of the primary allotment premium is very well settled: It is considered taxable and is categorised as ‘supply of service’ under Schedule II, the only exception is only when Entry 41’s conditions are satisfied. Where the lessor does not meet the government-ownership threshold, GST is payable notwithstanding the tenure of the lease.

The more contested question concerns secondary assignment. The tax authorities position has been that an assignment is not sale of land but an ‘agreement to transfer’ a benefit arising out of a right to occupy land, which may be categorised as a residuary taxable service. 

The Industry have contested this argument: that upon assignment, with authority’s consent, the assignee enters into the shoes of the original lessee entirely for the remaining term of the lease, in substance, equivalent to transfer of an interest in immoveable property and is therefore excluded under Schedule III.

There are two underlying propositions in this dispute: leasehold interest as a proprietary interest in land, whose assignment is a transfer of property rather than a rendered service; versus assignment as a facilitation arrangement separate from the land itself, particularly given with the lessor’s approval requirement. The Gujarat High Court’s reasoning discussed below, has now endorsed the former view for the specific pattern of GIDC (Gujarat Industrial Development Corporation) industrial leasehold assignments. 

A bigger unresolved question concerns the standalone transfer of the development rights, such as transferable development rights or floor space index, which is conceptually distinct from a leasehold interest in a specific plot. The Supreme Court’s dismissal of the revenue authority appeals have explicitly left this category open, so the underlying dispute persists outside the industrial plot assignment context, including in urban redevelopment transactions.

Case Laws

In the case of the Builder’s Association of Navi Mumbai v. Union of India, Bombay HC on 28 March, 2018 upheld that GST on the one time lease premium charged by the CIDCO (City and Industrial Development Corporation of Maharashtra) for the primary allotment of industrial plots, holding that letting out land on long term lease squarely falls within Schedule II as a ‘supply of service’; the Supreme Court subsequently affirmed this position, while dismissing the Special Leave Petition in 2022. 

Gujarat Chamber of Commerce and Industry v. Union of India, decided by the Gujarat HC on 3 January, 2025, is the central authority on secondary assignment. The Court held that assignment of leasehold rights in a GIDC (Gujarat Industrial Development Corporation) plot, together with constructed buildings, by an existing lessee to a third-party assignee for a lump-sum consideration constitutes a transfer of a benefit arising out of immovable property, and does not qualify as a supply of service under Section 7 read with Schedule III of the CGST Act; show-cause notices demanding GST were accordingly quashed. 

In Union of India v. Gujarat Chamber and Industry, on 21 July, 2026 the Supreme Court dismissed the special leave petitions filed by the revenue authority. This has effectively settled this position with finality for present, while leaving standalone development-rights transfers open for future adjudication.

This reasoning has been used as a precedent in subsequent HC decisions, until overturned. The Nagpur bench of the Bombay HC in the case of Hindustan Equipment Craft v. Assistant Commissioner of State Tax found that the transaction was of the nature of ‘transfer of benefit’ on a right arising from immovable property and not a ‘supply of service’, citing the Gujarat HC’s decision in Gujarat Chambers of Commerce and Industry v. Union of India. And consequently, the Court quashed the order for recovery of the GST and granted the writ petition, holding that they are not liable to pay GST.

Practical Implications

Impact on the Sector : As a common exit or restructuring strategy, leasing, or the assignment of leasehold rights, is a significant factor for small industries, especially those in GIDC, MIDC and other similar state corridors , for which the settled position offers material relief. A working capital lock-in that would have been created by an 18% GST demand can be avoided by allowing transactions to resume of the type that were paused pursuant to this litigation, including slump sales bundled with plot assignment. 

Documentation and Valuation : The documents describing the transaction should elaborate the transaction expressly as an assignment of leasehold right, and should avoid the language suggesting a facilitation service. A prior approval from the allotting authority should be obtained and referenced in the deed, consistent with the fact pattern courts have relied upon. Consideration should be divided between the leasehold interest, constructed structures, and any plant, machinery, or goodwill, since sale of moveable assets remains taxable regardless of the land outcome. Independent valuation reports confirming market consistent pricing would help to protect against re-characterisation as a disguised service fee.

Structuring Guidance for Developers : If one is structuring an exit or acquisition these should be done on a development-rights and FSI basis, as this category is not part of the settled position. Where the structure is departing from the GIDC fact pattern, it is recommended to include indemnity or gross-up clauses that address any residual GST risk and consider submitting an advance ruling application prior to the transaction being completed.

Contract Review Compendium : Confirm the underlying allotment is a long term lease of at least thirty (30) years and from a qualifying state industrial corporation.

Check to ensure that the approval or the no-objection certificate from the allotting authority has been recorded and included in the finalised deed.

Distinguish between leasehold interest, plant, machinery and goodwill and constructed structures. 

It shall be ensured that the stamp duty is correctly calculated and paid in accordance with the relevant state Stamp Act.

The deed should be prepared keeping in mind that it shall be categorised as an assignment or transfer of leasehold rights, rather than as a facilitation of service elsewise it will be taxable.

The transferable development rights or the floor space index components shall be separately assessed and evaluated.

One another valuation report should also be prepared which supports the fact that the price reflects prevailing land value rather than a service fee.

One GST Indemnity or gross-up clause covering re-characterisation risk, particularly for non-standard fact patterns should also be inserted in the finalised deed.

It should be ensured that there is no change made in the input tax credit position of both the parties and/or appropriately reversed where any taxable component exists.

Conclusion

Industrial leasehold transactions now sit at two separate points of settlements. The primary allotment premium has been categorised as taxable i.e. lies in the favour of the revenue/tax authorities, however, one narrow exception lies in the Entry 41 of the Notification. The secondary assignment, by contrast, has now been settled in the taxpayer’s favour following the Gujarat HC ruling and the Supreme Court’s reaffirming the same by dismissal of the SLPs filed by the revenue authorities. One thing remains open as of current legal standing which is the treatment of the standalone-development rights transfers and the assignments departing from the pattern established in the cases. This is an area where legislative clarification through an amendment to Schedule III or a fresh CBIC circular can be achieved. Until this position is not clarified, developers and counsels should structure and document leasehold transactions with the court’s reasoning, rather than commercial intuition alone, as the guiding reference point.

Author: Abhinav Verma in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References (Endnotes)

1. Central Goods and Services Tax Act, No. 12 of 2017, § 7(1)(a), Sch. II ¶ 2(a) (India).

2. Central Goods and Services Tax Act, No. 12 of 2017, § 7(2)(a), Sch. III ¶ 5 (India).

3. Notification No. 12/2017-Central Tax (Rate), entry 41 (June 28, 2017) (India).

4. Circular No. 101/20/2019-GST (Apr. 30, 2019) (Cent. Bd. of Indirect Taxes & Customs, India).

5. Builders Ass'n of Navi Mumbai v. Union of India, Writ Petition No. 12194 of 2017 (Bom. H.C. Mar. 28, 2018) (MANU/MH/0636/2018) (India).

6. Gujarat Chamber of Commerce & Indus. v. Union of India, R/Special Civil Application No. 11345 of 2023 (Guj. H.C. Jan. 3, 2025) (MANU/GJ/0667/2025) (India).

7. Union of India v. Gujarat Chamber of Commerce & Indus., S.L.P. (C) Diary No. 33270 of 2025 (S.C. July 21, 2026) (India).

8. Hindustan Equipment Craft v. Assistant Commissioner of State Tax and Ors., Writ Petition No. 1257 of 2026 (Bom. H.C. on Feb. 2, 2026) (MANU/MH/2035/2026) (India).