Assignment of leasehold rights in an immovable property – GST not leviable

The Hon’ble Gujarat High Court (High Court) in the case of Gujarat Chamber of Commerce and Industry v. Union of India,[i] has delivered a much-awaited judgement, dealing with applicability of Goods and Services Tax (GST) on assignment of leasehold rights in an immovable property. While delivering the judgment, the court also delved into the intent and purpose of introduction of GST, especially in relation to immovable properties.

In this article, we have discussed the ruling and its possible implications.

Facts of the case:

Gujarat Industrial Development Corporation (GIDC) established under the Gujarat Industrial Development Act, 1962 acts as Nodal agency for the development of industrial estates in Gujarat. GIDC acquires land and develops the same as an industrial estate by creating necessary infrastructure such as road, water supply, drainage etc. and also allots land to industrial entities on a long-term lease.

GIDC enters into licensing agreements with lessees under which GIDC agrees to execute a lease deed for a period of 99 years upon fulfilment of terms and conditions of the licensing agreement. The lease deed also allows lessees to assign the leasehold rights and interest (in such immovable property) to any other person subject to approval of GIDC.

GST Authorities issued summons/ show cause notices to members of Gujarat Chamber of Commerce and Industry (Petitioner)and others, who have assigned the leasehold rights in the plot of land allotted to them by GIDC. These show cause notices required the Petitioner to explain why GST should not be levied on such transactions of assignment of leasehold rights.

Consequently, this writ petition is filed to declare the show cause notices illegal and ultra vires.

Issue:

Whether assignment of leasehold rights of land along with the building thereon would be covered by the scope of supply for levy of GST under Section 9 of Central Goods and Services Tax Act, 2017 (CGST Act)?

Ruling of the High Court

Assignment of leasehold rights is not covered under “Supply of Services”

Under GST Act, tax is levied based on the concept of “supply” of goods or services. According to Section 7(1)(a) of the CGST Act, supply includes “all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”.

To ascertain the scope of “supply”, reference is made to Schedule II of the CGST Act which provides for activities or transactions to be treated either as supply of goods or supply of services. Under Clause 5(a) of Schedule II, renting immovable property is treated as ‘supply of service’. Therefore, allotment of land on lease, being an immovable property, would be covered by Clause 5(a) of Schedule II of the CGST Act.

Notification No 12/2017-Central Tax (Rate) dated 28 June 2017, a Nil GST rate is prescribed for one time upfront amount (called as premium, salami, cost, price, development charges or by any other name) leviable in respect of the service, by way of granting long term (30 years, or more) lease of industrial plots, provided by the State Government Industrial Development Corporations or Undertakings to industrial units. Therefore, GST is not levied when the land is allotted to the industrial unit i.e. the Petitioner, by GIDC. However, the issue arose in relation to the assignment of leasehold rights by the Petitioner.

The High Court observed that the deed of assignment of leasehold rights executed in favour of a third party-assignee is subject to levy of stamp duty under the provisions Gujarat Stamp Act, 1958 as well as compulsorily required to be registered under the provisions of the Registration Act, 1908. Further, the instrument of lease is liable to levy of stamp duty as prescribed for conveyance under Article 20, if the lease is for a period exceeding 98 years. Therefore, as per the provisions of the Gujarat Stamp Act, the instrument of lease is considered at par with conveyance for the sale of immovable property.

Additionally, the High Court explained the meaning of the expression “assignment”, relying on the Supreme Court case of Gopal Saran v. Satya Narayana,[ii] wherein it was ruled that assignment would include “the transfer by a party of all its rights to some kind of property, usually intangible property such as rights in lease, mortgage, agreement of sale or a partnership”. So, the assignment of leasehold rights is subject to levy of stamp duty being transfer of immovable property.  Accordingly, long term assignment of leasehold rights is equated to sale of immovable property.

GST is not leviable on assignment of leasehold rights in an immovable property

Now the question arises whether GST can be imposed on the transaction of sale of immovable property. To analyse the levy of GST in such a transaction, the High Court highlighted the intent and purpose of introduction of GST regime.

The intent and purpose of GST was to ensure that all the existing indirect taxes levied on supply of goods and services or both are subsumed in a single tax. The intention was never to change the foundations of taxation of value added tax and service tax regime. Therefore, supply of land in every form was excluded from the purview of GST.

Pursuant to this, Notification No 11/2017 was issued, wherein lease of property is included in Heading No. 9954 relating to construction services which provides rates of GST involving transfer of land or undivided share of land, as the case may be, and also the value of such supply which shall be equivalent to the total amount charged for such supply less the value of transfer of land or undivided share of land. The notification especially excluded the value of transfer of land from the levy of GST on construction services because such value is considered as the value of immovable property which is transferred.

Accordingly, the High Court ruled that assignment of leasehold rights will not be considered supply of services under Section 7 of the CGST Act, as it involves transfer of immovable property, specifically land and building. Clause 5 of Schedule III of CGST Act also states that sale of land is not treated as a supply of goods or services. Therefore, leasehold rights, being akin to sale of land, falls outside the scope of supply.

Conclusion

Based on the aforementioned rationale, assignment, sale, and transfer of leasehold rights of a plot of land allotted by GIDC to the Petitioner, in favour of a third-party assignee for consideration, constitutes sale of immovable property.  Sale of land is neither a supply of goods nor a supply of service under the CGST Act and therefore it will not be covered under the scope of supply of services under the CGST Act and GST will not be levied on the same because such transactions are already liable for state-imposed stamp duties.

Our thoughts

This is a welcome judgment for industrial plot holders and businesses engaged in assignment of leasehold rights, which is a common business practice. The judgment seeks to broaden the interpretation of the term – “sale of immovable property”. For tax authorities, this ruling serves as a crucial judicial interpretation of applicability of CGST Act and will require a reassessment of the approach to tax property-related transactions, particularly those involving long-term leasehold rights. This judgment underscores the need for a nuanced understanding of the GST framework and its implications for property transactions, ensuring that tax policies are aligned with the evolving legal interpretations.

Overall, this decision is expected to provide much-needed clarity and relief for stakeholders, fostering a more predictable and equitable tax environment for property-related transactions.

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.

[i] TS-03-HC(GUJ)-2025-GST.

[ii] (1989) 3 SCC 56.