• Dated 10^th February, 2025

GST Applicability on Leasehold Rights

The Hon'ble Gujarat High Court discussed on the applicability of GST on leasehold rights for land and buildings leased by the Gujarat Industrial Development Corporation (GIDC) are transferred by the original lessee or their successor to another party for a lump-sum payment.

GIDC, a government agency in Gujarat, develops industrial areas and leases land to businesses for 99 years. Once lease conditions are met and fees are paid, the lease is officially registered. Thereafter,the leaseholder can transfer their lease rights with GIDC's approval.The government questioned whether 18% GST should be applied to such transfersi.e.whether transfer/assignment of leasehold rights is atransaction of sale pertaining to immovableproperty or is supply of goods/services.

Following is a brief analysis of the ruling:

Petitioners' Contentions:

1. Nature of Leasehold Rights:

• The petitioners contended that the leasehold rights constitute an interest in land, classifying them as immovable property under Section 105 of the Transfer of Property Act and also emphasized that an absolute transfer of leasehold rights extinguishes the transferor's rights, making it a sale of immovable property rather than a service.
• Reliance was placed on Section 108 of the Transfer of Property Act, relating to lease as part of rights and liabilities of the lessee and such transfer of immovable property is covered under Section 53-A &Section 54 of Transfer of Property Act.

2. Interpretation of "Service":

• Section 2 (102) of the GST Act defines "service" as anything other than goods, money, and securitiesbut does not encompass absolute transfer of property.
• Petitioners argued that this definition does not include the transfer of immovable property and conceptually sale and service does not refer to transfer of property.

3. Legislative Intent:

• Petitioners claimed that GST provisions, particularly Schedule III, explicitly exclude the sale of land and buildings from being treated as supply. They argued that this reflects the legislature's intent not to tax immovable property transactions.
• They also said that the term "land" should not just mean the physical land itself but should also include rights connected to the land, such as leasehold or ownership rights. This idea is supported by the Constitution, under Entry 18 of List II to the Seventh Schedule, which defines "land" to include not just the land but also any rights over it, like ownership or use.
• Further, imposition of GST on assignmentof leasehold rights leads to doubletaxation inasmuch as both stamp duty atrate equal to conveyance of land as wellas GST are imposed which will lead tocascading effect of taxes.

Respondents' Contentions:

The respondent authorities maintained that the assignment of leasehold rights constitutes a taxable supply of service under the GST Act. They argued that:

1. Leasehold Rights Are a Service:When someone transfers their right to use or occupy land (like a leasehold right) to another person, it's essentially transferring a "benefit" or "interest" related to the land. Therefore, when one such rights i.e. right to occupy the land is transferred by the owner in favor of the lessee, the authorities see this as providing a service, which makes it taxable under GST.
2. Distinction Between Land and Related Rights:They argued that not everything connected to land is automatically considered part of the land (immovable property). For example, crops, grass, or anything growing on the land are treated as "movable property" under the GST law and other legal frameworks, even though they are attached to the land. Similarly, leasehold rights are not treated as the land itself but as a separate taxable service.
3. Tax Classification of Real Estate Services:They referred to a Notification No.11/2017 – Central Tax (Rate) dated 28.06.2017, that lists services related to real estate (like leasing or renting property) under a specific category with a 9% GST rate. According to the authorities, rental or leasing services involving own or leased nonresidential property falls under this category of taxable "real estate services."

Court's Findings:

1. Immovable Property Classification:

• The court observed that leasehold rights are inherently tied to immovable property.
• Considering the nature of transaction when lessor/assignor transfers the entire leasehold rights along with building constructed thereon to the lessee/assignee, it would amount to assignment of all the rights in the immovable property by the lessor/assignor. Hence, such assignments, that transfer the rights entirely resemble a sale rather than a provision of service.

2. Taxability Under GST:

• The court reviewed GST provisions, including the definition of "services" and exclusions in Schedule III, and found that the outright assignment resulting into sale/transfer of the leasehold rights in favour of assignee by lessee/assignor for a consideration would be covered by clause 5 of Schedule III which provides that sale of land and building shall not be considered as supply of services.

Comments:

This judgment passed by the Hon'ble Gujrat High Court, pressed an important question on the applicability of GST on transfer of leasehold right. Whereas, the court gave particular attention to the petitioner's argument that such transactions fall under Item 5 of Schedule III of the CGST Act, 2017 (which states that the sale of a building—if the full payment is made after completion or first occupation—is not considered a "supply" under GST), and not Item 2 of Schedule II (which categorizes certain activities as the supply of goods or services, making them taxable under GST).

Further, considering the nature of transaction, i.e., when a lessor or assignor transfers his leasehold rights, it effectively amounts to an assignment ofall rights/interest in the concerned immovable property. Thus, such an assignment resembles a sale rather than a provision of service. Consequently, GST on the same will not be applicable.

Author: Tanima Ghosh

Edited By: 

"¹Gujarat Chamber Of Commerce And Industry &Ors. Vs Union Of India &Ors. [R/Special Civil Application No. 11345 Of 2023 dated 03.01.25]"