GST on Transfer of Leasehold Rights In Industrial Land: Is The Question Really Settled?

By Khanindra Das Goods and Services Tax Articles October 4, 2026

Summary: In 2026, the Supreme Court twice refused to interfere with High Court rulings holding that GST is not payable when a business transfers its long-term leasehold rights in an industrial plot to another business. The Bombay High Court in Aerocom Cushions Pvt. Ltd. v. Assistant Commissioner followed the Gujarat High Court ruling in Gujarat Chamber of Commerce and Industry v. Union of India, which treated assignment of long-term leasehold rights as transfer of benefits arising from immovable property rather than a taxable supply of services. The Supreme Court dismissed the Revenue’s challenge to the Bombay ruling on 22 May 2026 and subsequently dismissed the challenges to the Gujarat ruling on 21 July 2026. However, contrary advance rulings, including the Andhra Pradesh ruling concerning Kobelco Construction Equipment India Pvt. Ltd., show that businesses outside Gujarat and Maharashtra may still face GST demands. The position is further complicated by Circular No. 44/18/2018-CGST, which has not been withdrawn, and by the legal effect of non-speaking Supreme Court dismissal orders. Businesses should therefore distinguish between the original grant of a lease and a subsequent assignment of existing leasehold rights, examine the jurisdiction in which the transaction occurs, preserve refund claims within limitation, carefully draft transfer documents and be prepared to contest demands where necessary. This article explains, in simple terms, what those rulings say, why tax officers in some States may still demand GST, and what a business should do to protect itself.

I. Introduction

Many businesses in India run their factories on land taken on a long lease, often for 99 years, from a State industrial development corporation. When such a business sells its factory or moves out, it usually transfers the remaining years of the lease to a new business in return for a lump sum. The question is simple: is GST payable on that transfer? For years, tax officers said yes and demanded GST at 18 per cent. Two High Courts, Gujarat and Bombay, have since said no. In 2026, the Supreme Court refused to entertain the Government’s challenges to both rulings: first on 22 May 2026, in the appeal arising from Aerocom Cushions Pvt. Ltd. v. Assistant Commissioner, and then on 21 July 2026, in the appeals against Gujarat Chamber of Commerce and Industry v. Union of India.

Most people would assume the matter is now closed. It is not quite closed. In a case concerning Kobelco Construction Equipment India Pvt. Ltd., the advance ruling authorities in Andhra Pradesh decided that GST is payable on exactly this kind of transfer. This article explains why two opposite answers can exist side by side, and what that means for businesses.

II. What the GST Law Says

GST is charged on a “supply” of goods or services made for payment in the course of business. Section 7 of the Central Goods and Services Tax Act, 2017 (the “CGST Act”) gives “supply” a wide meaning, covering sale, transfer, licence, rent and lease. Two lists in the Act matter here. Schedule II says that giving land on lease or licence is a supply of services, so GST applies. Schedule III says that a sale of land is not a supply at all, so GST does not apply.

The difficulty is that the transfer of a lease does not fit neatly into either list. It is not a full “sale” of land, because the business never owned the land; it only held a lease. Nor is it the grant of a new lease. The outgoing business is not renting anything out; it is giving up all its rights and leaving, and the new business simply takes its place for the remaining years. If the transfer is treated like a sale of land, no GST is payable. If it is treated like the grant of a lease, GST is payable. This is the question that has been argued for almost a decade.

III. The Tax Department’s View

In 2018, the Central Board of Indirect Taxes and Customs issued Circular No. 44/18/2018-CGST dated 2 May 2018. It dealt with “pagadi”, the lump sum paid in places such as Mumbai to take over a tenancy, and said that GST is payable on it, even though stamp duty is also paid and the document is registered.

That circular was about tenancies. But tax officers and several advance ruling authorities applied the same logic to transfers of long-term industrial leases granted by bodies such as the Gujarat Industrial Development Corporation (GIDC) and the Maharashtra Industrial Development Corporation (MIDC). They treated the money received by the outgoing business as taxable at 18 per cent, and many businesses received show cause notices between 2019 and 2024.

IV. First Grant of a Lease Compared with a Later Transfer

It is important not to confuse two different situations. The first is where a development authority gives a plot on lease for the first time and charges a one-time premium. In Builders Association of Navi Mumbai v. Union of India (Bombay High Court, 12 April 2018), the Court held that GST is payable on such a premium charged by CIDCO for a sixty-year lease, because the law clearly treats the grant of a lease as a supply.

The second situation is different: a business that already holds the lease later transfers all its remaining rights to another business. Builders Association did not decide this second situation. That is the situation this article deals with, and the one the Gujarat High Court later decided.

V. What the High Courts Decided

In Gujarat Chamber of Commerce and Industry v. Union of India (R/Special Civil Application No. 11345 of 2023, decided on 3 January 2025), the petitioners held GIDC plots on 99-year leases, many with factories built on them. They had transferred, or wished to transfer, their full leasehold rights to other businesses for a lump sum, with GIDC’s approval.

The Gujarat High Court set aside the tax notices. Put simply, its reasoning was as follows. First, a long-term lease is a right in the land itself, and therefore a form of property. Second, when a business transfers its whole lease, it hands over that property for good, including possession, use and the right to transfer it further; it is not providing any service. Third, under the old service tax law, even the transfer of development rights in land, which is a smaller right than a lease, was not taxed, so the transfer of the larger right cannot logically be taxed either. The transfer therefore falls outside GST.

The Bombay High Court took the same view in Aerocom Cushions Pvt. Ltd. v. Assistant Commissioner, where a business transferred the lease of its MIDC plot to another business with MIDC’s consent. The Court followed the Gujarat ruling and, according to reports, gave one further reason: a one-time sale of a factory plot lease is a capital transaction, not something done in the ordinary course of business, and so it is not a “supply” at all.

VI. What the Supreme Court Did, and Did Not, Decide

The Government’s appeal against the Bombay ruling was dismissed on 22 May 2026. Its appeals against the Gujarat ruling were dismissed on 21 July 2026, the Court noting that it had already dismissed a similar appeal. The Court also declined the Government’s request to decide whether a transfer of development rights alone, without the land, is taxable. That question remains open.

Does this settle the law for the whole country? Not necessarily. Under Indian law, when the Supreme Court dismisses an appeal at the admission stage without giving detailed reasons, it is only refusing to hear the case. It does not mean that the Supreme Court has approved the High Court’s reasoning as the law for all of India. This was laid down in Kunhayammed v. State of Kerala, (2000) 6 SCC 359, and repeated in Khoday Distilleries Ltd. v. Sri Mahadeshwara Sahakara Sakkare Karkhane Ltd., (2019) 4 SCC 376. Only a reasoned judgment of the Supreme Court binds every court and authority in the country under Article 141 of the Constitution.

From the reports available, neither order gave detailed reasons on the main question; the July order simply followed the May order. The Gujarat and Bombay rulings are therefore binding in their own States and will carry great weight elsewhere, but they are not yet the law of the land everywhere. There is a further point. If the Bombay ruling rested on the fact that a one-time sale of a factory plot is not part of ordinary business, tax officers may argue that it does not help a property developer or a dealer who regularly buys and sells industrial plots.

VII. The Opposite View in Andhra Pradesh: the Kobelco Case

In In re Kobelco Construction Equipment India Pvt. Ltd., the company held a 99-year lease, starting on 29 May 2015, of about 9.35 acres in Sri City, Andhra Pradesh. It proposed to transfer the remaining term of about 89 years to another company, with the landlord’s consent, for about Rs. 15.38 crore. The Andhra Pradesh Authority for Advance Ruling held that GST was payable on the transfer, and also on the transfer fee charged by the landlord.

On appeal, the Appellate Authority for Advance Ruling (Order No. AP/AAAR/02/2025) agreed. It held that the transfer was not a “sale of land”, and that a long lease period or a large one-time payment does not change the nature of the deal, which remains a transfer of the right to use land. It held that the Supreme Court’s decision in Chief Commissioner of Central Goods and Services Tax v. Safari Retreats Pvt. Ltd., 2024 INSC 756, concerned input tax credit and did not assist the company. It also relied on Circular No. 44/18/2018-CGST.

Two points are worth noting. First, an advance ruling binds only the business that applied for it and its own tax officer (Section 103 of the CGST Act); it is not a precedent for others. Second, and more importantly, the ruling shows that where the local High Court has not decided the question, tax authorities feel free to take a view different from Gujarat’s, and the 2018 circular, which has not been withdrawn, gives them a basis for doing so.

VIII. What This Means for Businesses

In practice, the uncertainty affects businesses in four ways.

First, tax notices.

A business that has transferred, or plans to transfer, an industrial lease in a State whose High Court has not ruled on the question may still receive a notice demanding GST, with interest under Section 50 and penalty, under Section 73 or 74 of the CGST Act, or under Section 74A for periods from 2024-25 onwards.

Second, pressure to pay.

Some industrial development corporations refuse to approve a transfer, or to record the new business as lessee, unless GST has been paid. Businesses are then compelled to pay simply to complete the deal, whatever the legal position.

Third, double cost.

Where GST is paid and stamp duty is also paid on the same transfer deed, the parties bear two taxes on what the Gujarat High Court treats as a single transfer of property. This affects the price and can lead to disputes over who should bear the tax.

Fourth, refund claims running out of time.

A refund of GST must ordinarily be claimed within two years from the “relevant date” (Section 54(1) of the CGST Act). A business that paid GST on a transfer made in 2021 or 2022, before the High Court rulings, may find that its time to claim a refund has already expired, even though two High Courts have since held that the tax should never have been charged.

IX. What a Business Should Do

If you have received a tax notice:

Reply to it, relying on the Gujarat and Bombay rulings and on the Supreme Court’s refusal to interfere with them. If the officer still confirms the demand, you need not always go through the regular appeal process. Because the objection is that no GST is chargeable at all, you may approach the High Court directly by way of a writ petition. The Supreme Court recognised in Whirlpool Corporation v. Registrar of Trade Marks, (1998) 8 SCC 1, that this is permissible where an authority acts without the power to do so.

If you have already paid GST on a past transfer:

Apply for a refund under Section 54 without delay, and state clearly that you reserve your rights on the question of time limits. Do not wait for the law to settle, because the two-year period keeps running from the relevant date. If the time limit has already passed, it may be possible to argue that time should run from the date of the High Court ruling, but this is uncertain, particularly in view of Mafatlal Industries Ltd. v. Union of India, (1997) 5 SCC 536, and would probably have to be decided by a court. You will also need to show that the tax was not passed on to the buyer.

There is also an emerging judicial divide on whether the two-year limitation under Section 54(1) necessarily applies where tax was paid without authority of law.

If your business is in another State, including Assam and the North-East:

For businesses holding leases from bodies such as the Assam Industrial Development Corporation, the Gujarat and Bombay rulings are helpful but not binding. Until the Gauhati High Court decides the question, the safer course in a dispute is to file a writ petition before the Gauhati High Court, relying on those rulings, rather than assume they will apply automatically.

When drafting the transfer deed:

The deed should state clearly that the outgoing business is transferring all its rights in the land, and in any building on it, for the remaining lease period; that the new business will deal directly with the original landlord; and that the outgoing business keeps no rights, sub-lease or continued use of the property. The deed should also say which party will bear any GST demand raised later, and include a suitable indemnity.

Seeking a change in the circular:

Trade and industry bodies may ask the Board to issue a fresh circular making clear that Circular No. 44/18/2018-CGST does not apply to transfers of long-term industrial leases. A single clarification of this kind would save businesses far more time and money than individual court cases.

X. Conclusion

The problem arises because the GST law was not written with transfers of industrial leases in mind. One list taxes leases, another excludes sales of land, and the transfer of an existing lease falls between the two. The Gujarat and Bombay High Courts have given the better answer: no GST is payable. But until the Supreme Court delivers a reasoned judgment, or the Government issues a clear circular, businesses outside Gujarat and Maharashtra should treat that answer as strong but not final. They should draft their transfer deeds carefully, file refund claims within time, and be ready to defend their position if a notice arrives.