A case study on leasing services provided by Government

Brief Background:

In the instant case, the Company (Developer) has identified the industrial land on lease from Government for a period of 99 years for setting up a plant i.e., for infrastructural development.

The Developer wished to enter into the lease agreement with the lessee i.e., Government for a total period of 99 years for setting up a plant for a consideration payable immediately or within mutually agreed upon period.

Query:

Based on the above background the let us understand the following:

• Whether the Lease agreement between the Developer and government i.e., the lessee and the lessor for a period of 99 years will constitute as a supply under GST or will be outside the purview GST & exempt from levy of GST?

• If yes, whether the GST paid on lease rental will be available to it as input tax credit (ITC) in terms of Section 16 & 17 of Central Goods and Service Tax Act, 2017

Legal Provisions:

♦ Section 7 of Central Goods & Services (“CGST”) Act’2017 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; 

(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration. 

Explanation. – For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another 

(b) import of services for a consideration whether or not in the course or furtherance of business; and 

(c) the activities specified in Schedule I, made or agreed to be made without a consideration; 

(d) omitted. 

(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.

♦ Schedule-II of CGST Act’2017

2. Land and Building, – 

(a) any lease, tenancy, easement, licence to occupy land is a supply of services; 

(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

♦ Exemption Notification no. 12/2017-Central Tax (Rate) dated 28 June 2017 (as amended)

The entry at S. No.41 of Notification no. 12/2017-Central Tax (Rate) dated 28 June 2017 reads as under:

S. No.	Chapter, Section, Heading, Group or Service Code (Tariff)	Description of Services	Rate (per cent.)	Condition
41	Heading 9972	Upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service by way of granting of long-term lease of thirty years, or more) of industrial plots or plots for development of infrastructure for financial business, provided by the State Government Industrial Development Corporations or Undertakings or by any other entity having 20 per cent. or more ownership of Central Government, State Government, Union territory to the industrial units or the developers in any industrial or financial business area. Explanation. – For the purpose of this exemption, the Central Government, State Government or Union territory shall have 20 per cent. or more ownership in the entity directly or through an entity which is wholly owned by the Central Government, State Government or Union territory.	Nil	Provided that the leased plots shall be used for the purpose for which they are allotted, that is, for industrial or financial activity in an industrial or financial business area: Provided further that the State Government concerned shall monitor and enforce the above condition as per the order issued by the State Government in this regard: Provided also that in case of any violation or subsequent change of land use, due to any reason whatsoever, the original lessor, original lessee as well as any subsequent lessee or buyer or owner shall be jointly and severally liable to pay such amount of central tax, as would have been payable on the upfront amount charged for the long-term lease of the plots but for the exemption contained herein, along with the applicable interest and penalty: Provided also that the lease agreement entered into by the original lessor with the original lessee or subsequent lessee, or sub- lessee, as well as any subsequent lease or sale agreements, for lease or sale of such plots to subsequent lessees or buyers or owners shall incorporate in the terms and conditions, the fact that the central tax was exempted on the long term lease of the plots by the original lessor to the original lessee subject to above condition and that the parties to the said agreements undertake to comply with the same.

♦ Circular No. 101/20/2019-GST F. No. 354/27/2019-TRU Dated 30th April, 2019

Vide aforesaid circular, tt is hereby clarified that GST exemption on the upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable for long term lease (of thirty years, or more) of industrial plots or plots for development of infrastructure for financial business under Entry No. 41 of Exemption Notification no. 12/2017-Central Tax (Rate) dated 28 June 2017 is admissible irrespective of whether such upfront amount is payable or paid in one or more instalments, provided the amount is determined upfront.

♦ Section 17 of CGST Act’2017 i.e., Apportionment of credit and blocked credits.

… (2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

Conclusion/view: 

In view of aforesaid provision / notification/ circular, it is evident that Developer would be eligible for the GST exemption subject to leasing of land (i.e., for setting up a plant) by Government for the period of 99 years. The leasing services in the instant case, may be construed as long-term leasing services of the land by Government to Developer.

It is further, re-iterated as clarified from the above-mentioned circular that; GST is not applicable on land lease. However, the exemption is conditional to the following:

• The lease term should be for a period of 30 or more years;

• The land for development of infrastructure for financial business should be provided by the State Government, Industrial Development Corporations or undertakings or by any other entity having 50% or more ownership of Central Government, State Government, Union territory to the industrial units or the developers in any industrial or financial business area.

• Upfront amount is payable or paid in one or more instalments, provided the amount is determined upfront.

• Thus, upfront amount (called as premium, salami, cost, price, development charges or by any other name) for land taken on lease for a period of 30 or more years will be exempt from GST.

Gist of Sr. No. 41 of Not. No. 12/201-CT) R)	Service provider	Service Recipient	Eligibility to exemption
Long term leasing of plot by Government	Government	Developer	i. The leasing service is provided by the Government. ii. Developer will set up a plant i.e., develop the land. iii. Service is long term leasing of plot for 99 years. iv. Consideration being, Lease rental exempted. v. The lease rental/consideration is paid in instalment should be determined upfront.

• Basis aforesaid discussion, since the lease rental paid will be exempt from GST, the ITC attributable for purchase made exclusively for exempted supplies would not available. Further, there could be ITC reversal requirement, in case Developer is engaged in supplying taxable as well as exempted services.

Reference:

1. Gujarat Authority for Advance Ruling in case of M/s. Gujarat Hira Bourse, Advance ruling no. GUJ/GAAR/R/52/2021, Dated 15th September, 2021;

2. Rajasthan Authority for Advance ruling in case of M/s. Greentech Mega Food Park Pvt, Advance ruling no.RAJ/AAR/2019-20/10

3. CGST Act’ 2017.