Imposition of GST on long-term lease transactions of industrial plots and immovable property has been a highly contentious issue ever since the introduction of GST in 2017. On this very ground, the Bombay High Court held that assignment of long-term leasehold rights was tantamount to transfer of benefits arising from immovable property and Because of this, was not liable to GST.
Imposition of GST on long-term lease transactions of industrial plots and immovable property has been a highly contentious issue ever since the introduction of GST in 2017. Companies holding leasehold rights granted by industrial development authorities like MIDC GIDC CIDCO, and other similar government bodies often transferred these rights when they were restructuring, relocating, or expanding their businesses.
Key Takeaways
- Imposition of GST on long-term lease transactions of industrial plots and immovable property has been a highly contentious issue ever since the introduction of GST in 2017.
- On this very ground, the Bombay High Court held that assignment of long-term leasehold rights was tantamount to transfer of benefits arising from immovable property and Because of this, was not liable to GST.
- The latest decision now stands as a strong judicial basis for the idea that grants of long-term leasehold rights of immovable property are not regarded as a taxable supply of services under GST.
- It guarantees that such transfers of long-term leasehold rights are treated as per the nature of immovable property interests and not considered as ordinary commercial services.
- Conclusion By its ruling, the Supreme Court has finally closed a dispute that had dragged on for years about the GST applicability on the assignment of long-term leasehold rights in immovable property.
GST Payable on Long-Term Lease Transfers of Immovable Property: The VakilKaro Brief
The Update
The Supreme Court refused to entertain the GST Department's Special Leave Petition against the Bombay High Court's verdict in the Aerocom Cushions case, Because of this practically affirming that the assignment or transfer of long-term leasehold rights in immovable property is not liable for GST.
The Impact
The judgement comes as a huge relief for industrial units, infrastructure firms, and other corporate entities holding long-term lease rights from government development authorities as it dispels the ambiguity for GST liability on such assignments and A lot mitigates the risk of the litigation arising out of it in future.
The Action
The entities that deal with the assignment or transfer of long-term leasehold rights should reconsider both their past and future transactions for this judgment and analyze the GST cases that are pending and could be influenced by the Supreme Court's verdict.
Understanding the GST Dispute on Long-Term Leases
The controversy began not long after the introduction of GST when the regulators started probing transactions involving the assignment of long-term leasehold rights. Industrial development corporations like MIDC GIDC CIDCO, and alike normally allocate plots through long-term leases, sometimes lasting 95 or 99 years. Usually, such deals entail a hefty upfront premium payment plus very low annual lease payments.
As their business models locations owners, or strategies have changed, quite a few enterprises have, over a period, resold/transferred these leasehold rights to others. GST officials regarded these transfers as 'supply of service' as per Section 7 of the CGST Act and So subjected to GST at 18 percent. On the opposite, companies argued that transfer of leasehold rights is simply a transfer of the benefits of an immovable property and So is not a taxable service.
Why Tax Authorities Sought to Levy GST?
The department's case was mainly based on Schedule II of the CGST Act, which identifies, among other things, leasing of property as a supply of service. The authorities maintained that leasehold rights are commercial rights that can be transferred and That means, they would be liable to GST when they are given for a consideration.
This view induced a wave of panic as many of the deals represented huge sums of money running into tens of crores. Enterprises were worried about a huge tax liability, whereas investors and developers were not sure about their costs of transaction. Also, the matter became all the more complicated as the long-term industrial leases given by the government in some cases were already being exempted from GST through the relevant notifications. Levying tax on subsequent assignments in such cases was, Because of this, an allegory of inconsistency in the entire structure.
High Courts Take a Different View
The first major milestone was set by the Gujarat High Court, which ruled that the assignment of long-term leasehold rights in land should not be treated as a taxable supply under the GST regime. The Court stated that such dealings were more related to the transfer of immovable property rights than to the provision of services.
Later, a similar matter came up before the Bombay High Court in the Aerocom Cushions case. The Court looked into whether the transfer of leasehold rights given by MIDC could be subject to GST. It observed that the original lessee's rights were totally extinguished upon the assignment, thereby the transaction was entirely different from a sub-lease arrangement.
Besides that, the Court underscored that the lessee company, which is transferring the leasehold rights, is not a business employing real estate as a trading commodity. Because of this, the transaction cannot be regarded as one made "in the course or furtherance of business" as required by Section 7 of the CGST Act. On this very ground, the Bombay High Court held that assignment of long-term leasehold rights was tantamount to transfer of benefits arising from immovable property and Because of this, was not liable to GST.
Supreme Court Brings Final Clarity
The GST authorities took the Bombay High Court's judgment to the Supreme Court. But Supreme Court did not want to change the judgment and dismissed the department's Special Leave Petition. The order of the Supreme Court was very short. Still, its importance is very high. By not overruling the reasoning of the Bombay High Court, the Court has virtually put an end to the dispute that had been running for years. The latest decision now stands as a strong judicial basis for the idea that grants of long-term leasehold rights of immovable property are not regarded as a taxable supply of services under GST. The judgment also upholds in reality not all transfers made for a consideration will be automatically covered by GST. Before the tax liability is imposed, the actual character of the transaction and its relationship with business activities should be thoroughly looked into.
What the Judgment Means for Businesses?
The ruling should affect the industrial and infrastructure sectors quite deeply. Companies that have long-term leases with industrial development corporations will now be able to plan their transfers and assignments more confidently for GST. The decision of the court may also be a game-changer for the cases where the government has issued GST demands on similar transactions. Companies, who are at the receiving end of the disputes, may gain some reinforcement from the rationale accepted by the HC(s) and SC. Because of policy, the decision has eliminated one of the largest hindrances to the industrial land dealings. It guarantees that such transfers of long-term leasehold rights are treated as per the nature of immovable property interests and not considered as ordinary commercial services.
Conclusion
By its ruling, the Supreme Court has finally closed a dispute that had dragged on for years about the GST applicability on the assignment of long-term leasehold rights in immovable property. The Court has aligned with the Bombay High Court's decision and made it clear that such transactions cannot be treated as taxable supplies of services solely on the ground that there is involvement of consideration. The decision has Much helped those enterprises which operate through industrial leases by giving them good level of legal certainty and lowering the tax risk inherent to restructuring and transfer transactions.
And, this decision has brought to light that it is very critical to investigate the real legal nature of transaction before it is alleged/assumed that GST has to be levied. Industries that keep growing and reshuffling, this historic judgement will not only be a leading reference point for the courts and taxpayers for GST on immovable property transactions but Sure, it will also Greatly help in developing policy and regulatory setup.
About Vakilkaro
Vakilkaro is a platform, owned by Jsons Solicitors Private Limited that simplifies access to legal and compliance advice in India. It connects people to registered practitioners such as Advocates, Chartered Accountants and Company Secretaries to handle company registration, documentation, drafting contracts and compliance requirements.
Besides that, the platform offers easy-to-understand explanations and the latest developments in corporate law taxation insolvency, and other areas so that businesses are always well-informed. Vakilkaro is not a law firm, nor does it provide legal advice directly. Instead, it is a medium through which users get connected with professionals, and services are offered both online and offline.
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Frequently asked questions
Is GST Payable on Long-Term Lease Transfers of Immovable Property?+
Imposition of GST on long-term lease transactions of industrial plots and immovable property has been a highly contentious issue ever since the introduction of GST in 2017. On this very ground, the Bombay High Court held that assignment of long-term leasehold rights was tantamount to transfer of benefits arising from immovable property and Because of this, was not liable to GST.