Explore the GST impact on the sale of leasehold land, a critical issue facing industries nationwide. Understand the legal provisions, exemption notifications, and conflicting judgments. Get insights on valuation, input tax credit, and the need for clear government guidance.
One of the hot issue which is faced by Industry across the country is GST impact on sale of leasehold land. New companies have their units set up on the leasehold land provided by the State Industrial Development Corporation (SIDC) for 99 years or above. In case, such companies do not want to continue their operations on those lands, they sell these right to third party for remaining lease life of land. For getting such rights over the land, these entities have to pay lease charges to transferor. Taxability under GST for such transfer of leasehold land is hot topic as of now. Department is demanding additional 18% GST on sale value of leasehold land. This is causing genuine hardship to the honest taxpayers requiring them to pay additional 18% cost.
Currently one of the important issue faced by lot of industry & majorly MSME regarding applicability of GST on sale of leasehold land. As department audit is going on for lot of companies, department issuing GST demand for sale of leasehold land. GST department has put the industry in a state of fear by sending summons and starting an investigation on the transfers of leased State Industrial Development Corporations area since July 2017
It is important for us to know what is exact taxability for sale of leasehold land.
Legal Provision:
Lease of Land (Schedule II)
As per Schedule II of CGST Act, 2017, following activity is considered as Service:
2. Land and Building
(a) any lease, tenancy, easement, licence to occupy land is a supply of services;
Sale of Land (Schedule III)
Section 7(2)(a) of the CGST Act 2017 provides that certain activities or transactions provided in Schedule III would be treated neither as supply of goods nor as supply of services i.e. not a supply altogether. As per Schedule III of CGST Act, 2017, following will not considered as supply:
5. Sale of land, subject to clause (b) of paragraph 5 of Schedule II , sale of building.
Sale of land would be treated neither as supply of goods nor as supply of services. Sale of freehold land and completed building is not a supply as per Schedule III of the CGST Act 2017.
Exemption Notification:
Notification no. 12/2017-Central Tax (rate) dated 28th June 2017 is the mega exemption notification for services which provides for the list of all exempt supplies.
Entry 41 – “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.”
This exemption is applicable only when unpfront amount is received by State industrial corporations / undertakings. In case original buyer transfer the right to other person, this exemption notification is not applicable.
Sale of Leasehold land is considered as sale of immovable property or benefit arising of land?
As per the Registration Act 1880 “immovable Property” includes land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth, or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops nor grass
As per the General Clauses Act 1897 “Immovable property’ shall include land, benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth”.
Leasehold rights is a benefit conferred upon a person to enjoy the occupancy and possession over the land for the lease period. Therefore, leasehold rights amount to a benefit arising of land. Since benefit arising of land is considered as an immovable property, leasehold rights can also be classifiable as immovable property. Assignment of leasehold rights amounts to transfer of an immovable property
As per Section 3(a) of Land Acquisition Act, 1894 The expression ‘land’ includes benefits that arise out of land and things attached to earth or permanently fastened to anything attached to the earth”
As per Section 3(4) of Bombay Land Revenue Code, 1879 ‘land’ includes benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth and also shares in or charges on the revenue or rent of village or other defined portions of territory”
The above definitions clearly provide that land would include benefits arising of land. On the other hand, the definitions of immovable property above treated land separately from benefit arising out of land.
If the leasehold rights are treated as land itself, no tax would be applicable on its assignment. On the other hand, if the said leasehold rights being benefit arising of land is treated separate from land, then the same would be treated as a supply under the GST law.
Long term lease can be considered as Sale of Land?
Whether long term lease can be treated to be equivalent to sale of land has been question which the courts have examined long before GST was envisaged. The answer to this question may not be available from the GST law directly. Therefore, this question is being analysed from judgements under the erstwhile regime apart from GST also.
1. Favourable Judgement:
In the case of RIICO Ltd. v. Commissioner of C. Ex. [2017] (New Delhi – CESTAT), the following was held:
“Admittedly, substantial part of the demand against the appellant in various proceedings, relate to their Service Tax liability on lump-sum premium amount, received by them from the allottees on allotment of land on long term basis. In view of the introduction of new Section 104 in the Finance Act, 1994 the appellant’s liability on such consideration no longer exists. The one-time payment received for grant of long term lease of 30 years or more of industrial plot, is not liable to Service Tax for all the periods covered in the present proceedings. However, we hold that the appellants are liable to pay Service Tax in respect of such one-time amounts received in respect of lease granted for less than 30 years.
The appellants are liable to Service Tax on the activity of leasing of land, for use in the furtherance of commerce or business, from 1-7-2010. However, considerations received as lump-sum upfront payment in respect of lease of land for a period of 30 years and above shall not be liable to such tax;”
2. Adverse Judgment:
Recently, in the case of Builders Association of Navi Mumbai v. Union of India [2018], the question before the Hon’ble Bombay High Court was whether the allotment of land on a long term lease of 60 years would be treated as supply of services. In para 14 of the judgement, the Hon’ble Court analyzed the transaction in the context of the definition of supply under Section 7 of the CGST Act 2017 to provide that the lease premium paid for long term lease of land for 60 years would get covered within it. It held as follows:
“However, clause (a) of sub-section (1) of Section 7 includes 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. We referred to the definitions simply to reinforce our conclusion that the CIDCO is a person and in the course or in furtherance of its business, it disposes of lands by leasing them out for a consideration styled as one-time premium. Therefore, if one refers to Schedule II, Section 7, then, Item No. 2 styled as land and building and any lease, tenancy, licence to occupy land is a supply of service. Any lease or letting out of a building, including commercial, industrial or residential complex for business, either wholly or partly is a supply of service. It is settled law that such provisions in a taxing statute would have to be read together and harmoniously in order to understand the nature of the levy, the object and purpose of its imposition. No activity of the nature mentioned in the inclusive provision can thus be left out of the net of the tax. Once this law, in terms of the substantive provisions and the Schedule, treats the activity as supply of goods or supply of services, particularly in relation to land and building and includes a lease, then, the consideration therefor as a premium/one-time premium is a measure on which the tax is levied, assessed and recovered. We cannot then probe into the legislation any further.”
Above judgment clearly states that long term lease of land cannot be treated as sale of land. It is supply of service.
Aforesaid matter is pending before the Hon’ble Supreme Court in the case of Builders Association of Navi Mumbai v. Union of India – [2018] (18) G.S.T.L. J169 (S.C.)]
Advance Rulings on Sale of leasehold Land:
There are multiple advance ruling on similar issues are Enfield Apparels Ltd [2020] 118 (AAR – WEST BENGAL), Greentech Mega Food Park (P.) Ltd. [2019] (AAR – RAJASTHAN), India Pistons Ltd. [2021] (AAR – TAMILNADU). They have clearly held that long term lease cannot be equivalent to sale of land and would be taxable under the GST law.
Though these advance rulings are applicable only to parties who has applied for such ruling but these rulings gives indications regarding department point of view on such transactions.
Valuation of Leasehold Land:
Some times building is also transferred as part of the contract apart from the rights over the land. In case of a completed building or super structure, the value pertaining to the building would not be subject to GST as per Schedule II of CGST Act 2017.
In order to reduce the impact of GST and have more certainty of its impact, it is suggested that one should bifurcate the value of leasehold rights of land and the building separately. Both value should be clearly mentioned in transfer deed regarding value of Lease hold land & building.
Input tax credit on GST paid on sale of leasehold land:
In case transferor charge GST on sale of leasehold land, it is important to know whether transferee can get input tax credit for such GST amount paid to transferor.
Section 17(5) of the CGST Act, 2017 and SGST Act,2017 provides the list of input services on which input credit is not available.
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Now there are multiple type of transactions which we need to analyse the credit eligibility:
1. What will be scenario when only open land leasehold right is transferred to buyer and no new construction has been undertaken?
2. Leasehold right transferred & transferee has used that land for new construction?
3. Land & building transferred & additional construction carried out on existing construction?
We need to analyse all these individually to decide credit eligibility which require altogether different article on this.
Conclusion:
Lot of units have not paid GST on the assignment of leasehold rights of such land taken on lease from SIDC based on the understanding that “assignment of leasehold rights in land” is akin to “sale of land” and such transactions fall under Schedule III of the CGST Act on which GST is not payable. The units have paid stamp duty as per the sale of land, and also paid the income tax on short-term and long-term gains considering it as deemed ownership and the premium is paid to SIDC for transferring the lease.
Many MSME association have appealed to the central government to review the issue of GST on leased land affecting MSMEs across the country.
Depending on the risk appetite on any entity, one may take a call regarding the taxability and payment of taxes on such assignment of leasehold rights. It is suggested that the negotiation between the assignor and assignee should carefully analyse the impact of GST and the future risk exposure if the said amount is not discharged immediately.
It is important for government to give clear guidance on taxability of sale leasehold land. To boost the investment in business by MSME, it is important that central government should give concession on such transfer of leasehold land.
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