The applicability of Goods and Services Tax (“GST”) on various land-related rights has been a subject of ongoing debate, leading to uncertainty for businesses, developers, and policymakers. While the GST framework seeks to tax the supply of goods and services, transactions involving land and immovable property present unique challenges due to their distinct legal nature.
Schedule III of the Central GST Act, 2017 (“CGST Act”), explicitly excludes the sale of land and buildings from the scope of GST. However, complexities arise when dealing with land-associated rights, such as leasehold rights, transferable development rights, long-term mining leases, or licensing agreements, etc. The classification of such transactions – whether constituting a taxable supply of services or a transfer of immovable property, has led to a lack of uniformity in the interpretations by the tax authorities and the Courts. This, in turn, has resulted in litigation and compliance challenges, necessitating legislative clarity to ensure a balanced approach that aligns with both ,tax laws and the property laws.
Latest Gujarat High Court decision
The Gujarat High Court’s (“HC”) decision in Gujarat Chamber of Commerce and Industry & Ors. v. Union of India & Ors.[1] provides the much-needed clarity on the applicability of GST on the assignment of leasehold rights. The judgment holds that the assignment of leasehold rights in the land allotted by Gujarat Industrial Development Corporation (“GIDC”) constitutes a transfer of immovable property, thus falling outside the purview of GST. This decision is expected to have significant ramifications across industries dependent on leasehold land, raising important legal and policy considerations.
The dispute arose when several taxpayers started receiving notices demanding GST payment on the assignment of leasehold rights for industrial plots allotted by GIDC. The taxpayers argued that such assignments constituted a “transfer of immovable property”. Relying on the Transfer of Property Act, 1882, and judicial precedents under the erstwhile Service Tax regulations, they argued that leasehold rights constituted a “benefit arising from land” and should be treated as a transfer of immovable property, and hence, GST should not be payable on such transfers.
The GST authorities, however, contended that transferring leasehold rights constitutes a supply of services under the CGST Act and is, therefore, liable to GST. They also argued that leasehold interest is an intangible asset and its transfer should be taxable rather than the transfer of immovable property itself. However, the HC held that leasehold rights extend beyond mere possession and include a bundle of rights akin to ownership, such as the right to possess, enjoy income from, alienate, or recover ownership of the title, etc. Thus, the assignment of leasehold rights was classified as a transfer of immovable property, and thus, it is not a taxable supply under GST.
Impact of Decision
The judgment is particularly significant because it delves into the interpretation of GST provisions in the context of property laws. The HC examined Section 7(1) of the CGST Act, which defines “supply” and brings certain property-related transactions within the ambit of GST. It also scrutinised Schedule II of the Act, which treats the renting of immovable property as a supply of services. While the initial allotment of land by GIDC was considered taxable but exempt under Notification No. 12/2017-Central Tax (Rate), the HC held that subsequent assignments of leasehold rights by the first assignee to another person would qualify as transfer of immovable property, thereby falling outside the scope of GST. It further held that a 99-year lease is akin to an outright sale, reinforcing the view that such transactions should not attract GST.
The judgment brings much-needed relief to businesses by removing an additional layer of taxation on leasehold assignments, particularly in industrial sectors. This ensures that such transactions do not suffer from double taxation, as stamp duty is already levied on the transfer of leasehold rights. Moreover, the ruling aligns with previous judicial interpretations under the Service Tax regime, where transfers of immovable property were explicitly excluded from the purview of tax.
The decision also removes ambiguity regarding the availability of ITC on the GST paid on transfer of leasehold rights. Unfortunately, some tax officers were reading Section 17(5)(d) of the CGST Act in a restrictive manner, which, according to them, prohibited the claim of ITC on goods or service used for construction of an immovable property. While the consideration paid towards a right to use the leasehold land is not related directly to the construction of factory or warehouse buildings and is not considered a consumable service, it was the point of contention. This recent clarification that GST is not applicable to the transfer of leasehold rights also resolves the ITC issue.
Challenges and Potential Counterarguments
The HC ruling clarifies one aspect, but certain counterarguments merit consideration. For instance, the assignment of leasehold rights could be treated as a surrender to the lessor rather than a sale to a third party, possibly changing the nature of the supply and making it subject to GST. Another counterpoint is that while Schedule III of the CGST Act specifically excludes sale of land and buildings from GST, it does not explicitly address benefits arising out of land. This may be contended as an unintentional omission by the legislature.
Moreover, a previously issued circular by the Central Board of Indirect Taxes and Customs[2] had clarified that tenancy rights are subject to GST. Considering the said circular has not been declared ultra vires, it creates an apparent contradiction in the treatment of similar property-related transactions.
Finally, the GST authorities may also appeal the ruling before the Supreme Court, which would then provide the final word on the matter. If the Supreme Court also rules in favour of the taxpayers, there is a possibility of Schedule III being amended to overturn the current position.
Potential Impact on Other Benefits Arising Out of Land
The impact of this judgment extends beyond leasehold assignments to broader constitutional implications. Similar transactions, such as transferring development rights in real estate projects, are also highly contentious. If such rights are considered benefits arising from land, they could be claimed as exempt from GST based on this decision, reducing tax costs for developers and builders. This could significantly impact the taxation of real estate transactions, potentially lowering project costs and encouraging investment in urban development.
A dispute on the levy of GST on the transfer of development rights, currently before the Madras High Court, is being challenged as unconstitutional. Legal experts have argued that taxing development rights encroaches on the states’ legislative powers under Entry 18 of the State List in the Seventh Schedule of the Constitution. The outcome of this case could further influence the applicability of GST to land-related transactions.
The Telangana High Court had earlier ruled in Prahitha Construction Private Limited v. Union of India[3] that the transfer of development rights does not qualify as sale of land, and is, therefore, taxable. The Supreme Court also refused to stay this judgment, reinforcing the uncertainty surrounding the taxability of property-related rights. In the previous service tax regime, the CESTAT Chandigarh in the DLF Commercial Projects Corporation Ltd vs Commissioner of Service Tax case[4] and the CESTAT Kolkata in the M/s Amit Metaliks Limited vs Commissioner of CGST case,[5]however,categorically held that development rights are benefits arising from the immovable property; hence, no service tax was payable as per the exclusion in terms of Section 65B(44) of the Finance Act, 1994. These conflicting interpretations across different Courts highlight the need for a definitive ruling from the Supreme Court to settle the issue conclusively.
Key Takeaway from a Policy Perspective
The Gujarat HC’s ruling underscores the need for legislative clarity on the taxation of land-related rights under the GST regime. While Schedule III of the CGST Act excludes the sale of land and buildings from the levy of GST, it does not provide similar explicit clarity on other long-term leasehold rights or similar land-related transactions. This omission has led to differing interpretations by tax authorities and Courts, creating uncertainty for businesses and investors. The GST Council should take steps to refine the law and provide a uniform framework for the taxation of immovable property-related benefits and income arising from there.
The HC’s ruling is likely to encourage industrial development by reducing transaction costs for businesses acquiring leasehold rights. However, it also raises concerns about revenue losses and potential litigation from businesses seeking refunds of past GST payments. An unintended consequence of this ruling could be the requirement to reverse ITC as per Section 17 of the CGST Act, as it contains a provision deeming the sale of land and building as exempt supply. This could become highly contentious and problematic because of the very high value for assigning leasehold rights.
As the legal landscape evolves, businesses must closely monitor future developments and assess the implications of this ruling on their operations. Ultimately, this judgment serves as a critical reminder of the complexities involved in GST’s interaction with property law. While it provides clarity on leasehold rights, it also exposes gaps in the GST framework that require urgent attention from policymakers. Until the Supreme Court provides a final word on the matter, taxpayers must navigate the evolving legal landscape with caution, ensuring compliance while exploring avenues for potential tax relief.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
sr.patnaik@cyrilshroff.com
[1] Gujarat Chamber of Commerce and Industry & Ors. v. Union of India & Ors., 2025 (1) TMI 516.
[2] Circular No. 44/18/2018-GST.
[3] Prahitha Constructions Private Limited versus Union Of India, 2024 (2) TMI 902.
[4] DLF Commercial Projects Corporation Ltd vs Commissioner of Service Tax, [2019 (5) TMI 1490].
[5] M/s Amit Metaliks Limited vs Commissioner of CGST [2019(11) TMI 183].
