Summary: One of the most common commercial arrangements in India is leasing of land and structures thereon. However, its interplay with the Goods and Services Tax regime has led to certain interpretational and compliance challenges, particularly in determining whether specific leases constitute taxable supply or qualify for exemptions based on the nature of the property or its intended use. For stakeholders, including landlords, tenants, and developers, evaluating and understanding these implications is essential to mitigate any tax exposure. This blog gives an overview of the GST implications on leases and key considerations that stakeholders must consider.
Introduction
The Goods and Services Tax (“GST”), introduced in 2017, unified multiple indirect taxes, such as service tax and value added tax, into a single framework. Leases and licenses of immovable property, too, underwent major reclassification under the GST. Earlier, lease taxation was based on whether a transaction qualified as a service or a deemed sale. GST resolved this inconsistency by expressly qualifying leases as a supply of service. This was done to ensure that commercial usage of immovable property was taxed, and not its ownership, in a consistent and uniform manner. While the principle is straightforward, its practical application on commercial, residential, and industrial leasing can be difficult to comprehend.
Any lease, tenancy, easement, or licence to occupy land or building has been categorised as a supply of service under Schedule II of the Central Goods and Services Tax Act, 2017 (“CGST Act”). Essentially, where one person confers the right to use an immovable property to another person, without transferring ownership, it qualifies as a taxable supply of service, which is in line with the principle of focusing on the economic use, and not the ownership of the asset. This provision covers all leasing arrangements under its ambit, apart from those that amount to a title transfer in land or building.
Types of Leases and GST Implication
The GST implications pertaining to leases varies depending on the nature of the property, and its intended use:
- Commercial leases: A lease for office spaces, shops, warehouses, and other business premises is taxable at 18%.
- Residential leases: Under Entry 12 of Notification No. 12/2017–Central Tax (Rate)[1], a lease for a residential dwelling for use as a residence is exempt. However, from July 18, 2022, onward, this exemption is not available if a residential dwelling is rented for business purposes, such as for operating guest house or office, etc. In such cases, GST becomes payable under the reverse charge mechanism.
- Industrial leases: Long-term leases granted by state authorities, such as the Karnataka Industrial Areas Development Board (“KIADB”), Maharashtra Industrial Development Corporation (“MIDC”), and Gujarat Industrial Development Corporation (“GIDC”), often create challenges in assessing the GST implication. Although these leases typically attract 18% GST, exemptions may be available for long-term leases for industrial or infrastructure development.
Consequently, the applicable tax treatment will depend on the nature and classification of the property’s use.
Long-Term Leases and Sale Transactions
One of the continuing areas of debate under the GST regime relates to long-term leases that closely resemble ownership. State development authorities, including the KIADB, MIDC, and the GIDC, generally allot land under 60-to-99-year lease-cum-sale arrangements. These arrangements grant possessory rights to the lessee, including the right to construct, mortgage, or transfer the property, with subsequent conveyance upon fulfilment of certain specified conditions.
Under Schedule III of the CGST Act, the sale of land and completed buildings are excluded from the scope of GST. Courts have therefore examined whether such long-term leases amount to a transfer of title, making them akin to sale transactions. The Gujarat High Court, in Gujarat Chamber of Commerce and Industry & Ors. v. Union of India[2], drew a critical distinction between two materially different transactions. The first is the initial grant of a long-term lease by a state development corporation such as GIDC, whereby the corporation allots land on a 99-year lease and charges a one-time upfront premium. This transaction constitutes a supply of service under the CGST Act, as it amounts to renting of immovable property. However, such supply attracts a nil rate of GST under Entry 41 of Notification No. 12/2017–Central Tax (Rate), which exempts one-time upfront amounts for long-term leases of 30 years or more, granted by State Government Industrial Development Corporations to industrial units. The second transaction is the subsequent outright assignment of leasehold rights by the lessee to a third-party assignee. In these transactions, the lessee, acting as the assignor, transfers its leasehold interest in its entirety, together with any structures constructed thereon, to the assignee for a lump-sum consideration. The transaction results in complete extinguishment of the assignor’s right, and the assignee effectively assumes the position of original lessee. The Court distinguished such assignments from a lease or sub-lease, holding that “it amounts to transfer of benefits arising out of immovable property”. Consequently, such transactions fall within the ambit of Clause 5 of Schedule III as an exclusion and is not subject to GST under Section 9 of the CGST Act.[3] While the judgement provides significant clarity, the GST implication must be assessed on a case-to-case basis.
This position has been further reinforced in Bombay High Court’s decision in Aerocom Cushions Private Limited v. Assistant Commissioner (Anti-Evasion), CGST & CX, Nagpur-1[4], wherein the petitioner had assigned its leasehold rights in a 95-year MIDC lease, along with the factory building constructed thereon, to a third-party assignee for a lump-sum consideration. The Court observed that the transaction was essentially a transfer of benefits arising out of immovable property and was not carried out in the course of the petitioner’s business. Accordingly, it could not be regarded as a supply of services and fell outside the scope of Section 7(1)(a) of the CGST Act[5].
This distinction is critical, especially for developers and industrial lessees. A transaction involving assignment of leasehold rights may not attract GST, although stamp duty would still apply. However, where a transaction is treated as a lease, it will attract 18% GST on upfront premiums, rentals or any other consideration included in such lease, in any form.
Security Deposits, Maintenance Charges, and other Considerations
In addition to periodic rentals, lease arrangements also involve ancillary payments such as security deposits, maintenance fees, and utility charges. While a refundable security deposit does not form part of the consideration, and is not subject to GST[6], any subsequent forfeiture, or adjustment against rent can trigger GST implications. Maintenance and common area charges on the other hand are generally treated as separate taxable supplies and are subject to 18% GST.
It is therefore essential for lease documentation to clearly specify the nature of each payment and its tax treatment. This reduces dispute risks during tax audits or assessments.
Place of Supply and Compliance Obligations
Section 12(3)(a) of the Integrated Goods and Services Tax Act, 2017, governs the place of supply of services in relation to immovable property and provides that the location of the property is the place of supply. Hence, a landlord/ lessor is obligated to maintain GST registration in each state where the property is situated and leased out while leasing properties in different states. For developers and corporations with multiple properties in multiple jurisdictions, this requirement often results in additional administrative and compliance obligations.
Compliance and Drafting Considerations
Complying with GST requirements is a critical aspect of lease transactions. GST becomes payable upon the date of the invoice or the receipt of rent, whichever is earlier. Consequently, landlords need to issue timely invoices and maintain proper records. Leases should clearly allocate GST component, specifying whether the rent is inclusive or exclusive of GST. Additionally, leases should specify the obligations of tax remittance, particularly reverse charge mechanisms. Tenants must also verify and ensure that returns are being filed in a timely manner by their landlords and GST is being paid correctly, as any lapses in return filing and any non-compliance may affect their right to claim input tax credit.
Businesses that manage multiple leased properties face substantial compliance obligations as lease taxation can differ based on the property’s usage and location.
Conclusion
While the GST has significantly simplified the indirect tax framework, lease taxation continues to involve complexities and interpretational challenges. Although the classification of lease as supply of service promotes consistency in tax treatment, its practical application can be nuanced, particularly in assessing long-term leases and deemed sales, navigating compliance obligations across states, and evaluating the appropriate tax treatment for ancillary payments, such as security deposits and maintenance charges. Considering the evolving judicial precedents and regulatory guidance, all stakeholders should continuously evaluate their contractual arrangements and tax positions to ensure compliance.
For further information, please contact:
Harsha Sudhindra, Partner, Cyril Amarchand Mangaldas
harsha.sudhindra@cyrilshroff.com
[1] Notification No. 12/2017–Central Tax (Rate) dated June 28, 2017
[2] R/Special Civil Application No. 11345 of 2023, dated January 03, 2025
[3] SLP (C) Diary No. 33270 of 2025 dated July 21, 2026
[4] 2026 (1) TMI 701 – Bombay High Court.
[5] “Section 7. Scope of supply.-
(1) For the purposes of this Act, the expression – “supply” includes-(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;”
[6] Section 2(31) of CGST Act
