Leasehold Rights and GST: Analyzing Gujarat High Court’s Verdict

In the case of Gujarat Chamber of Commerce and Industry & Ors. v. Union of India (decided on January 3, 2025), the Gujarat High Court dealt with the issue of whether the assignment of leasehold rights in industrial plots amounts to a taxable “supply of service” under Section 7 of the Goods and Services Act, 2017 (GST Act) or if it should be treated as a transfer of immovable property exempt from GST under Schedule III of the Act.

Background of the Issue

The Gujarat Industrial Development Corporation (GIDC), established under the Gujarat Industrial Development Act, 1962, acquires land, develops industrial estates, and leases plots to industrial units for 99 years. Terms under the lease agreement allow lessees to assign leasehold rights to third parties, subject to the fulfilment of certain conditions. Post the enactment of the GST Act, the tax authorities issued notices to such lessees who assigned their leasehold rights (the petitioners), demanding GST @18%.

The petitioners argued that the said transaction to third parties was an absolute transfer of immovable property, which created a new legal relationship between them and the assignees, thus, falling outside the scope of “supply” under GST. Though Section 7(1)(a) of the GST Act defines “supply” to include activities such as leasing or renting of immovable property, Schedule III of the Act exempts the “sale of land” and “sale of building” from GST, categorizing them as neither a supply of goods not a supply of services. Further, the petitioners relied on the Transfer of Property Act to argue that lease of immovable property is an interest in land and building and constitutes “profit a prendre”. Every such interest in immovable property is a benefit arising out of land, which should be treated as immovable property itself. [State of West Bengal v. Gautam Sur AIR 2008 Cal 1, Narendra Dhar v. State of Uttar Pradesh 2010(4) AIILJ 481].

On the contrary, the Respondents contended that the transfer of leasehold rights is a supply of services under Section 7(1) and thus taxable under GST. Leasehold interest is an intangible asset, which is not the immovable property itself. Reliance was placed on Legal Heris of Deceased Fakir Chand Ambaram Patel v. OI of Amruta Mills Limited 2002(3) GLH 367, where it was held that leasehold interest is an intangible asset and transferable subject to the terms of the lease. Furthermore, the exclusion of only the sale of land and building in Schedule III implies that other immovable property transactions, like leasehold rights, are covered under services.

Court’s Ruling

The Gujarat High Court ruled that the assignment of leasehold rights does not constitute “supply of services” under Section 7 of the Act, and thus exempt from GST. Clarifying the difference of scope between Schedule II, which covers renting of immovable property as a service, and Schedule III of the Act, which exempts GST on sale of land and building, the Court held that assignment of leasehold rights aligns with the objective of exemption set out in Schedule III.

Author’s Analysis of the Judgement

The author agrees that a leasehold right constitutes an interest in immovable property. However, it is important to understand that an interest in immovable property cannot be equated to the immovable property itself. Consider this scenario where ‘A’ hires contractor ‘B’ to construct a building on his land. Contractor ‘B’ subsequently hires contractor ‘C’ to complete the construction. If the construction service provided by contractor ‘B’ is treated as a supply of services and liable for GST, the same reasoning should extend to the arrangement between ‘B’ and ‘C’. The mere delegation of the right to construct from ‘B’ to ‘C’ does not constitute a sale, as the arrangement remains one of service provision—whether between A and B, B and C, or A and C. No sale is involved.

A similar logic applies in the present context. Just because a lessee transfers the leasehold interest to an assignee, it should not automatically be classified as the “sale of immovable property.” Assigning of leasehold rights by a lessee should be treated in the nature of compensation for agreeing to do the transfer of the applicant’s rights in favor of the assignee. It should be a service classifiable under “Other miscellaneous service” and taxable 18% under SI No. 35 of Notification No. 11/2017 CT (Rate) dated 28/06/2017. This reasoning also aligns with the decision of Bombay High Court in case of Builder Association of Navi Mumbai v. Union of India, wherein the Court held that GST was payable on grant of lease. Thereby, the author is of the view that the Hon’ble Gujarat High Court erred in equating the assignment of leasehold rights as the sale of immovable property, and thus exempting this transfer from GST.

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Author: Mahi Agrawal, Student at Hidayatullah National Law University, Raipur