No GST on Leasehold Rights Transfer:
Gujarat Chamber of Commerce and Industry & Ors. Vs Union of India & Ors.[R/Special Civil Application No. 11345 of 2023]
The Gujarat High Court recently delivered a landmark judgment regarding the applicability of Goods and Services Tax (GST) on the assignment of leasehold rights for industrial plots allocated by the Gujarat Industrial Development Corporation (GIDC).
The case arose from multiple civil applications filed by the Gujarat Chamber of Commerce and Industry, challenging the tax authorities’ attempts to impose an 18% GST on transactions involving the assignment of long-term leasehold rights.
GIDC, established under the Gujarat Industrial Development Act of 1962, plays a crucial role in developing industrial estates by acquiring land and creating essential infrastructure for industries.
In the leasing process, GIDC acquires and develops land, executes a licensing agreement with potential allottees, and creates a 99-year lease deed that permits assignees to transfer lease, the tax authorities began issuing summons and show-cause notices to industrial plot holders alleging that the assignment of leasehold rights should be treated as a supply of services under GST, leading to the demand of an 18% tax on such transactions. The Gujarat Chamber of Commerce and Industry contested these notices, arguing that such transfers should not attract GST or, at the very least, that input tax credit should be allowed.
In its judgment, the Gujarat High Court carefully examined several key definitions under the GST Act, which are crucial for determining the applicability of GST to the assignment of leasehold rights.
“Business” – Defined under Section 2(17) of the CGST Act, 2017, as any trade, commerce, manufacturing, or professional activities, along with activities connected to or incidental to business. It includes transactions that occur with a certain level of volume, frequency, or continuity, as well as the supply or acquisition of goods and services related to the commencement or closure of business operations.
“Goods” – According to Section 2(52) of the CGST Act, 2017, goods are defined as every kind of movable property, except for money and securities. This definition includes actionable claims, growing crops, and things that are attached to land but are agreed to be severed.
“Services” – As per Section 2(102) of the CGST Act, 2017, services are anything other than goods, money, and securities. This includes activities related to money, its use, or its conversion.
“Scope of Supply” – Section 7(1) of the CGST Act defines the scope of supply, which includes all forms of supply of goods or services. For a transaction to be taxable under GST, it must be made for consideration and conducted in the course or furtherance of business. This provision covers various forms of supply, such as sale, transfer, barter, exchange, license, rental, lease, or disposal.
These definitions were crucial for the court’s analysis to determine whether the assignment of leasehold rights constitutes a “supply” under the GST framework. Based on these definitions, the court examined whether transferring leasehold rights amounted to a supply of goods or services, concluding that it should be treated as a transfer of immovable property and therefore exempt from GST.
The judgment noted that the term “immovable property” is not explicitly defined under the CGST Act, but it is understood from other legal frameworks to include rights that come with land or buildings.
The court further explained that in the case of leasehold rights, the title to the plot remains with GIDC, and the transfer of leasehold rights essentially involves divesting the assignor of all rights in the property, including possession and usage rights. The court also noted that under previous service tax laws, even development rights (which are benefits arising from land) were not taxed, and leasehold rights could be viewed as a greater right and interest in land than development rights.
Based on this analysis, the Gujarat High Court ruled that the assignment of leasehold rights is not liable to GST. The court concluded that such transactions should not be treated as a supply of services under the GST Act, and therefore, GST should not be applied.
While this decision provides temporary clarity and will likely influence similar legal issues across India, the High Court’s analysis of GST’s applicability in property-related transactions could lead to further refinements in the legislation. Ultimately, a final and definitive ruling from the Supreme Court may be required to conclusively resolve this matter and provide long-term certainty in the tax treatment of leasehold rights.
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