GST on leasehold rights and industrial plots
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Introduction : If you have ever found yourself in the uncomfortable position of explaining to a client why the tax authorities wanted to treat a seemingly innocuous long term lease assignment as a taxable supply, you are in good company. Developers have been complaining, and quite rightly so, that the assignment of long-term leasehold rights in industrial plots (GIDC land allotments in Gujarat, MIDC plot allotments in Maharashtra and similar rights in other states) have been consistently treated by the tax authorities as a taxable service ever since the introduction of GST. Developers grumbled, but nobody was willing to challenge this position in the courts until recently, when the Gujarat High Court ruled that such an assignment could not possibly be a taxable service and was in fact a transfer of immovable property.
What Went Wrong?
As explained in the order, the GST law is particularly problematic in that the definition of "service" is so broad and includes anything that is not a "good". The only way to exclude a transaction from the definition of a supply is by referring to Schedule III of the CGST Act. This Schedule specifically refers to the sale of land and building as not amounting to a supply. Thus, in as much as an outright sale of property would not be taxed as a supply, a long-term lease with an upfront premium, which is freely assignable and subject to mortgage would arguably be similar to a sale.
Under service tax law, a transfer of rights similar to a sale would simply not be regarded as a service and thus escaped taxation. Under the GST law, the drafting exercise was different and the tax authorities took advantage of the difference in the drafting to conclude that such a lease assignment would amount to a supply of service.
The Gujarat High Court had to rule on whether such a long-term lease assignment amounted to a supply of service or a transfer of immovable property and if the latter, why did the GST law continue to include it in the schedule of exempted items as "sale of land and building"?
Summary of the Gujarat HC Order
The dispute in the Gujarat case revolves around a typical assignment of a GIDC plot by one lessee to another against payment of a lump sum amount. The GIDC allottee assigns his rights to another developer for consideration. Once the assignment takes place, the GIDC allottee has no further interest in the plot, and has no right of reversion even if the assignee defaults. The Gujarat HC concluded as follows:
An assignment of long-term lease (99 years lease or more, but for a lump sum consideration) is a transfer akin to sale or mortgage. As such it did not meet the definition of a supply of service.
By virtue of Schedule III to the CGST Act, the assignment of such a leasehold interest fell within the definition of supply of land and building which were specifically excluded from the definition of supply.
The Court specifically referred to the GST Council discussions which occurred at the earliest stages of the introduction of GST. It appears that the GST Council had deliberated the applicability of tax to the sale of land and building and had declined to impose tax partly because there was no constitutional obligation to do so. In other words, Parliament could have imposed tax on such a transaction, but chose not to do so.
Similarly, the assignment of leasehold rights similar to sale does not meet the definition of a supply. However, it must be noted that Schedule II to the CGST Act lists out supplies that are deemed to be a supply of goods or services and the initial assignment of a lease by GIDC to the lessee falls under this category (as it is a supply of goods). Any subsequent assignment of rights by the allottee to another developer would fall under Schedule III and would be excluded as land and building.
The Gujarat High Court thus drew a distinction between an "assignment" (which may be accompanied with the retention of right of reversion) and a "sub-lease". It is important that developers draw a distinction between the two, and that this distinction reflects in their assignment documents. A sub-lease would fall under Schedule II to the CGST Act and would thus be subject to GST. Developers must also keep in mind that although the assignment of a long-term lease with lump sum premium, and not recurring rentals, may not be subject to GST, a sub-lease with instalment payments would most likely be subject to GST.
Why This Matters Beyond the State
The order is not confined to Gujarat and the issues before the Gujarat HC. The Bombay High Court had recently referred to this dispute and had set aside the order passed by the tax authorities and had asked the parties to file submissions on the applicability of the Gujarat order to similar disputes in other jurisdictions. It may be noted that the Gujarat order only has applicability in that state, but it is bound to influence the considerations of other High Courts. Thus, the observations of the Gujarat High Court are most relevant to disputes pending before other High Courts.
The dispute is of direct relevance to developers, industrial park owners and manufacturing companies who have been making lease assignments in SEZs, industrial parks, IT Parks, etc. Lease assignments are a regular feature in industrial park developments especially in light of the recent boom in industrial land prices. Developers have been charging hefty premiums for such assignments and these premiums may be as high as crores of rupees. It is therefore pertinent to note that the tax implications of such a transaction can have significant bearing on the developer's pricing, liquidity, documentation and legal positions.
Documentation and Invoicing Issues
The documentation and invoicing issues relating to such lease assignments are of immediate relevance to developers as compared to other considerations. With respect to documentation, developers must make sure that assignment deeds are drafted in a manner that GST liability can be excluded. The assignment deed must also be consistent with the facts of the transaction. It may therefore be advisable for the developer to not raise a GST invoice on such an assignment. On the flip side, if the assignment deed clearly shows that there is no right of reversion and that no sub-lease exists, even if it is by name only, the invoice raised by the assignor may not have GST.
Developers must take utmost care in distinguishing between a sub-lease and assignment with retention of the right of reversion. If a sub-lease exists, it must be treated as a supply of service and GST must be charged and paid accordingly. Similarly, if the assignment deed provides that the assignor shall have right of reversion in case the assignee defaults, such a right of reversion must be disclosed and the assignment deed must specify if such a right of reversion is retained, or the assignment of lease is a complete and absolute transfer with no rights retained by the assignor. This issue may arise especially in cases where the assignor is a developer who has retained some rights by name even in the assignment deed.
Developers must also revise their standard templates and invoicing procedures. If the developer has, till date, raised GST invoices on lease assignments, such a practice must be re-examined. Such developers must also take great care not to stop raising GST invoices on lease assignments without proper examination. In other words, if the assignment deed clearly shows that the assignee has complete rights and that there is no right of reversion, sub-lease or even an implied licence, than it may be possible for the developer to avoid GST. However, the invoice must also be able to demonstrate this fact lest the dispute comes before the tax authorities or the courts.
It may also be useful for developers, especially those who have entered into lease assignments in the past, to create records of all such assignments. Records of board resolutions, assignment deeds, payments and communication showing the intent of the parties to either make or avoid GST would be extremely pertinent to any refund claims or dispute resolution processes that may arise.
Refunds: If You Paid GST, What Can You Do?
As stated in the previous sub-section, developers must immediately review their procedures and documents with respect to lease assignments in order to avoid raising GST invoices or, in the best case, to be able to claim a refund if GST has already been paid. With respect to the latter, you must understand the implications of refund claims. A refund claim under the GST law is not easy as you have to first prove the "unjust enrichment" of the state.
This may mean that a refund claim may be possible if the liability for GST had been wrongly passed on to your buyer/customer. Alternatively, if a refund claim is being made by your buyer/customer in respect of GST paid to you on a lease assignment (this would be the case if the assignment was wrongly charged), the buyer/customer must prove this.
With respect to the latter, it is important to note that the revenue department will almost certainly challenge the Gujarat Order and the value of GST is too high for the government to roll over on this issue without a challenge. In other words, it would be unwise to delay a refund claim for as long as the Gujarat case reaches the Supreme Court as limitation periods for refund claims cannot be suspended indefinitely.
Positions Open to Developers in Ongoing Disputes
The following positions may be considered by developers who are facing show-cause notices from the tax authorities on this issue:
The transaction should be regarded akin to sale or mortgage as it involves alienation of immovable property. The position of the Revenue in this regard finds no support in property laws. On the contrary, Courts across the country have held that lease of land for a period of 99 years or more with lump sum premium is tantamount to a sale.
The assignment of lease with lump sum payment and no right of reversion does not amount to a supply of service, but falls under the definition of "sale of land and building" as per Schedule III. This being the case, such a transaction would be subject to exemption. This position must be coupled with a discussion of the facts of the case before the Gujarat High Court.
If the facts of the assignment of lease resemble that of the case before the Gujarat High Court, there is considerable likelihood that similar relief would be granted in similar cases. As stated previously, the Bombay High Court has also referred to this dispute and has asked to consider its observations. While it cannot be said to binding on other jurisdictions, it can serve as an aid to construction of law. It must also be noted that it is only a matter of time before this dispute reaches the Supreme Court.
Industry bodies may take up this issue for clarification from the GST Council. A clarification from the GST Council would be far more useful in resolving disputes than relying on a decision of one High Court at a time.
The position of non-taxability should not be stretched beyond reasonable limits in other disputes. This includes other benefits that may be derived in respect of lands and buildings. In other words, the reasoning used in the Gujarat HC order should not be applied to other disputes, especially if the facts before the tax authority do not sufficiently resemble that before the Gujarat HC.
The Big Picture
Lease assignments have been a headache for developers, as well as tax authorities, for some time now. The dispute is a welcome opportunity to clarify the distinction between "supply of services" and "supply of goods", as well as items that are "not supply". As such, the order passed by the Gujarat High Court is a step towards greater certainty in GST law. However, it is far from the final word on the matter. Developers have been treating this GST as a cost of doing business, but it is time they pushed to make it a matter of law.
Author: Shambhavi Ghosh 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.
Reference
The Central Goods and Services Tax Act, 2017
Constitution of India
Notification No. 12/2017–Central Tax (Rate), dated 28 June 2017
SCC Times Article: Shweta Walecha & Derlene Joshna, Levy of GST on Assignment of Leasehold Rights: Aftermath of Gujarat High Court's Verdict, SCC Times (7 February 2025).