Lease of Land and issues in GST?

Article contains Important Definitions related to Lease of Land and issues in GST, Schedule entries related to  Lease of Land, Reverse Charge Mechanism on Land Lease, Important Judgement and AAR related to GST on Land Lease with FAQ on Issues like: What is the difference between the lease of Land v/s Building?, What is a Lease? (Premium, upfront fees, right to use, rent, etc.), Period of Lease? (One time, 30 years less or more), Type of Land? (Industrial v/s Residential), Who is the Supplier? (Govt v/s private entities), Who is the recipient? (Individual v/s promotor),  Its taxability? (Forward Charge v/s Reverse Charge), ITC on Land Lease? And many more issues…….. 

1. Important Definitions: –

1.1. “Business”

Definition of “Business” is provided under sub-section (17) of section 2 of the CGST Act, 2017:

As per sub-section (17) of section 2, the term “business” includes ––

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager, or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity, or regularity of such transaction;

(i) any activity or transaction is undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

1.2 “Scope of Supply”-

Definition of “Supply” is provided under section 7 of the CGST Act, 2017 (as amended):

Section 7(1) provides that 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, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(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;

1.3  Section 7(1A) provides that ––

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.

Para 2 of Schedule-II provides that ––

(a) any lease, tenancy, easement, license 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. 

1.4  The term “Land” is nowhere defined in GST law. 

1.5  “Government” –

Definition of “Government” is provided under sub-section (53) of section 2 of the CGST Act, 2017:

As per sub-section (53) of section 2 the term “government” means the Central Government. 

1.6 “Governmental Authority” –

As per clause (zf) of the notification no. 12/2017 Central Tax (Rate) “governmental authority” has the same meaning as assigned to it in the Explanation to clause (16) of section 2 of the Integrated Goods and Services Tax Act, 2017

As per sub-section (16) of section 2 of IGST Act, 2017, the term “governmental Authority” means – an authority or a board or any other body,––

(i) set up by an Act of Parliament or a State Legislature; or

(ii) established by any Government,

with ninety percent. or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution; 

1.7 “Local Authority” –

Definition of “Local Authority” is provided under sub-section (69) of section 2 of the CGST Act, 2017:

As per sub-section (69) of section 2 the term “local authority” means ––

(a) a “Panchayat” as defined in clause (d) of Article 243 of the Constitution;

(b) a “Municipality” as defined in clause (e) of article 243P of the Constitution;

(c) a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund;

(d) a Cantonment Board as defined in section 3 of the Cantonments Act, 2006;

(e) a Regional Council or a District Council constituted under the Sixth Schedule to the Constitution;

(f) a Development Board constituted under article 371 and article 371J of the Constitution; or

(g) a Regional Council constituted under article 371A of the Constitution;

2. Schedule entry of renting or leasing services:

SAC	Description	GST%
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 50 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	0%
997211	Rental or leasing services involving own or leased residential property	18%
997212	Rental or leasing services involving own or leased non-residential property	18%

 3. Reverse charge mechanism (RCM) in case of renting & leasing services of land:

As per sub section (3) of section 9 of CGST Act, 2017, read with notification 13/2017 Central Tax (Rate) dated 28^th June, 2017 (as amended), in case of renting and leasing services of land, tax is required to be paid by the recipient under reverse charge mechanism as follows:

Entry	Particulars	Supplier	Recipient
5A	Services supplied by the Central Government, State Government, Union territory or local authority by way of renting of immovable property to a person registered under the CGST Act, 2017 [Notification 03/2018 Central Tax (R)]	Central Government, State Government, Union territory or local authority	Any person registered under the CGST Act, 2017
5B	Services supplied by any person by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project by a promoter [Notification 05/2019 Central Tax (R)]	Any Person	Promoter
5C	Long term lease of land (30 years or more) by any person against consideration in the form of an upfront amount (called as premium, salami, cost, price, development charges, or by any other name) and/or periodic rent for construction of a project by a promoter. [Notification 05/2019 Central Tax (R)]	Any Person	Promoter

Explanation – The term “promoter” shall have the same meaning as assigned to it in clause (zk) under section 2 of the Real Estate (Regulation and Development) Act, 2016. 

Rent includes lease, tenancy premium, one-time premium, salami, cost, etc. 

4. Important AAR and Judgements:

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 a 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, license to occupy land is a supply of service [Builders Association of Navi Mumbai Vs Union of India (Bombay High Court)]. 

Also, reference can be made to below AAR’s

i. Hazari Bagh Builders Pvt. Ltd. (GST AAR Rajasthan):

We find that the RLDA is not awarding industrial plots to applicants but a portion of land over which some residential infrastructures are meant to be built. An industrial plot is the one in which the developer is granted permission by competent authority be it Central Government/ State Government in reference to some scheme of development. These plots are for a specific purpose and if plot-holders in the future tries to engage in some other work or lease conditions of the agreement are breached, then the developer has every right to eject that plot-holder. In the present case, RLDA is just providing a parcel of land which is in its ownership, therefore; the lease of the same cannot be categorized as meeting condition of industrial plot and for the purpose of financial business. RLDA has leased ordinary plots for residential purposes consequently the conditions of the said notification are not satisfied. Therefore, the said notification is not applicable in the instant case. 

ii. Jinmagal Corporation (GST AAR Gujarat):

iii. Nagpur Integrated Township Pvt Ltd ( AAAR MH):

Works Contract-Appellant seeking a ruling as to whether the activity of granting long term lease of the residential apartments would amount to “transfer of immovable property” and hence not liable to GST? If not, what are the appropriate classification and applicable GST rate for the said activity?

Held that-Appelleate authority agree with the findings and order of the Advance ruling authority who observed that in the subject case, there is a composite supply of works contract for construction of flat, which is intended to be handed over to the buyer, but the transaction is projected as if it is a lease transaction. The AAR also observed that the entire consideration would be received before issue of the Completion Certificate for the project, which does not generally happen in a lease transaction. The AAR also observed that there is not much difference in the price charged for an outright sale of similar apartments in the area and the lease premium payable. Accordingly, the AAR has held that the activity would be in the nature of “works contract” as defined under Section 2 (119) of the Act and fall under SAC 9954 and attract GST @ 18%. 

iv. Daicel Chiral Technologies (India) Private Limited: ( AAR Telangana) (ITC):

Issues Involved:- Applicant is not eligible to claim ITC of tax paid on Lease Premium Charges, Annual Lease Rentals & Maintenance Charges paid to lessor towards land lease for business purpose.

Held that—
we hold that the impugned services referred by the applicant have been received for construction of immovable property on their own account and therefore input tax credit on those services is barred under the provisions of clause (d) of Sec.17(5).

v. Greentech Mega Food Park Pvt. (AAR RAJ):

It’s not a Sale as, The Lease Agreement between the Applicant i.e. the lessor and the Lessee for a period of 99 years is a Lease Agreement of immovable property classifiable under HSN 9972 and attracts GST @18% (SGST 9% + CGST 9%). 

5. FAQs on Lease of Land and issues in GST:

Arjuna (Fictional Character):  Krishan, what is the matter going on of GST on the lease of Land?

Krishan (Fictional Character): Dear, Arjuna, GST is a very complex subject for the real estate industry. There is a difference in taxation of Land and Building. Any lease, tenancy, easement, license to occupy land is a supply of services. On must understand the basics of GST when question of levy of GST arises on Lease of Land. Various factors like who is Supplier, Recipient, Type of Land, no of years of Lease all together effect the taxability of Lease of Land. Due to above confusion, now recoveries are made by CIDCO, other City Development authorities, etc. from the common people who have taken land on lease for residence also. Lots of question are going to be raised. 

Arjuna (Fictional Character):  Krishan, Whether GST is leviable on lease of residential plot also?

Krishan (Fictional Character): Arjun, definition of Land is not there in GST. Exemption from GST is provided to Long Tern Lease of 30 years and more of Industrial purpose Land by Specified Govt entities only. For e.g. Long-term lease given by MIDC is exempt. This creates lot of hurdle for Residential and Commercial purpose Land leases under GST. Further only promoter is exempt from RCM of GST on long term lease of land of 30 years for residential purpose subject of sale of all units before completion certificate of the residential project. For e.g. if builders take Long term lease from CIDCO he is covered in above RCM and exempt for GST, subject to compliance of other conditions mentioned earlier.  Thus, notices are sent by CIDCO for GST on lease of plots after 1-7-2017 for tax @ 18% on the total lease collected by CIDCO from all. 

Arjuna (Fictional Character):  Krishan, so what is the remedy for the residential plot lease owners many times it Sub lease also?

Krishan (Fictional Character): Arjuna, Govt should reduce burden of tax on residential property lease by the Govt entities like CIDCO. But today every transaction of lease needs to be scrutinized in case of non-industrial lands. Further Sub lease by person of such lease of land needs to check whether it is his business or not, whether it is included in Supply definition. Case to case view needs to be taken in such cases. 

Arjuna (Fictional Character):  Krishan, what lesson should one learn from above?

Krishan (Fictional Character): Lease includes Tenancy, Premium, Rights to use, etc. Hence one should always be care full when taking any land on lease. Nowadays GST is very aggressive on real estate transactions. Hope Govt will address this problem of tax on lease of residential lands and give relief to homeowners.