One Transaction, Two Realities? Deconstructing GST on Leasehold Assignments Post-GCCI Ruling
The recent Gujarat High Court ruling in Gujarat Chamber of Commerce and Industry v. Union of India has become a critical point of discussion for tax and legal professionals across the country. It navigates the intricate relationship between property law and the deeming fictions of the GST regime, particularly concerning the taxability of assigning long-term leasehold rights.
The judgment’s core finding — that the initial grant of a lease is a taxable service, while its subsequent assignment is a non-taxable “sale of land” — invites a deeper exploration of the underlying legal principles. This article seeks to analyse the nuances of this position by addressing a series of structural questions that arise from the ruling.
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Character of a Transferred Right
Q.1 If the very creation of the leasehold right by GIDC is legally established and accepted as a ‘supply of service’, by what legal principle does this ‘service’ transmute into ‘land’ upon its subsequent transfer?
A subsequent transfer, or assignment, is merely the transfer of the unexpired portion of that original service contract. The assignee is not acquiring the underlying asset but rather taking over the benefits of an ongoing service. The assignee is simply stepping into the unexpired portion of the very same ‘supply of service’ that was initiated by GIDC. This creates a logical paradox if the right is treated as a “service” at its birth but as “land” upon its sale.
The Act of Divestment v. the Character of the Right
Q.2 Assignment is a ‘sale’ because the lessee-assignor divests itself of ‘all the absolute rights in the property’. Does the assignor’s act of divesting change the fundamental nature of the right being transferred? Should the tax classification be based on what the assignor gives up, or on the inherent character of the right the assignee receives?
The defining factor for tax classification should be the inherent nature of the right itself, not the action of the transferor. While an assignor indeed divests their entire interest, the right they transfer remains a temporary entitlement to enjoy property, with ownership and ultimate reversionary interest vested in the original landlord (GIDC). The right received by the assignee is identical in character to the right held by the assignor – a tenancy. Therefore, the tax classification should lawgically attach to this unchanging character of the right, not to the fact that the previous holder has exited the arrangement.
The Analogy of a Prepaid Service Contract
Q.3 Consider a 10-year membership to a premium club (building), paid upfront. This is undeniably a service. If, after 3 years, the member assigns the remaining 7 years of membership to another person for a price, has he sold the ‘club’ or has he sold the remaining benefit of a prepaid ‘service contract’? Why should the transfer of a long-term service contract for land be treated as a sale of the underlying asset, when this logic applies to no other service?
To contextualise the issue, consider a parallel in another service industry. A member of a premium club who has paid a 10-year upfront fee is a recipient of a service. If they assign the remaining seven years to another person for a price, they are not selling the club itself; they are transferring the benefit of a prepaid service contract. The assignment of a 99-year leasehold right, which is fundamentally the right to occupy (a service), is structurally no different. Applying a unique logic that treats the transfer of a long-term land-based service contract as a sale of the underlying asset creates an inconsistency that doesn’t appear in the treatment of other services.
The Principle of Nemo Dat Quod Non Habet
Q.4 The judgment concludes that the assignment of a leasehold right is a ‘sale of land’ for the purposes of Schedule III. The lessee-assignor never possessed ownership of the land; they only possessed the right to a service (the right to occupy). How can a party transfer a title they never had? Does this not violate the fundamental legal principle of nemo dat quod non habet?
A “sale” in property law is fundamentally a transfer of ownership. The judgment concludes that an assignment of a leasehold right qualifies as a “sale of land” under Schedule III of the CGST Act. However, the lessee-assignor never possessed ownership of the land; they only held a right to a service—the right to occupy. This raises a critical question based on the foundational legal principle of nemo dat quod non habet (no one can give a better title than he himself has). If a party never had title, the act of transferring their limited right cannot be elevated to a “sale of land.”
Harmonious Construction of GST Schedules
Q.5 Schedule II, Para 2(a) of the CGST Act is explicit in classifying ‘any lease, tenancy… license to occupy land’ as a supply of services. Does the act of assigning the lease remove it from the ambit of being a ‘lease’?
Statutory interpretation requires that specific provisions be given their full effect. Schedule II, Para 2(a) of the CGST Act is explicit and specific in classifying “any lease, tenancy… license to occupy land” as a supply of services. An assignment is the legal mechanism for transferring such a lease. By giving a very broad and purposive interpretation to the general exclusion of “Sale of land” in Schedule III, there is a risk of rendering the specific, clear words of Schedule II otiose in the context of assignments. The principle of harmonious construction would suggest that the specific deeming fiction for leases should be the primary guide.
The ‘Aspect Doctrine’ in Taxation
Q.6 The petitioners argued that since Stamp Duty is paid on an assignment as a ‘conveyance’, GST cannot apply. How can the treatment of an assignment for Stamp Duty purposes (as a conveyance) determine its nature for GST purposes?
Stamp Duty and GST are taxes on different aspects of a single transaction. Stamp Duty is levied on the instrument, while GST is levied on the economic supply. Accepting this “aspect doctrine” means that the classification of a transaction for Stamp Duty purposes (e.g., as a “conveyance”) should not determine its classification for GST purposes. Each tax is levied on a different legal aspect and should be analysed independently within its own statutory framework.
The Indisputable Reversionary Right
Q.7 How can the intermediate transfer between two tenants (assignor and assignee) be elevated to the status of a ‘Sale of land,’ which legally requires the permanent extinguishment of all reversionary rights?
The ultimate feature that distinguishes even a 999-year lease from a sale is the reversionary right held by the freehold owner. The undisputed fact that the land reverts to the landlord (GIDC) at the end of the term legally prevents the lease from ever being a sale. Given this, it is lawfully challenging to see how an intermediate transfer between two tenants (from assignor to assignee) can be elevated to the status of a “Sale of land,” a transaction which, by definition, requires the permanent and absolute extinguishment of all such reversionary rights.
These questions underscore the inherent legal friction between the established concepts of property law and the specific legal fictions created by the GST framework. The resolution of this dichotomy will undoubtedly require further judicial clarification at the highest levels.
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