gst on assignment of lease

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GST update on taxability of assignment of leasehold right in immovable property

Sale of land is out of the ambit of GST Act as it is an entry in the schedule III but there are some services related with the land are liable to GST. These services include:

Construction services wherein consideration is received prior to completion certificate.
Leasing services associated with the land.

Now the latest update is regarding taxability of assignment of leasehold right in immovable property and admissibility of input tax credit thereon which was raised before the AAR in the case of M/s ENFIELD APPARELS LTD.

GST update on taxability of assignment of leasehold right in immovable property

Case of M/s ENFIELD APPARELS LTD:

The NCLT, Kolkata Bench, passed an order on 06/08/2018, initiating the corporate insolvency resolution process, admitting the applicant as the corporate debtor, and appointed Sri Kanchan Duatta as Interim Resolution Professional (IRP).
The applicant is under liquidation and one of the assets under liquidation is leasehold property, taken on lease for 99 years from the West Bengal Industrial Development Corporation Ltd. The one of the condition of lease was that it can be sub-leased after 5 years from the date of signing of deed after taking approval of the West Bengal Industrial Development Corporation Ltd. on payment of transfer fees i.e. 10% according to prevailing market value of the property as assessed by the Registering Authority of the State Government.
Now the query arises before the AAR was whether GST is payable on the consideration received on assignment of leasehold right in property to another person and whether ITC can be claimed on transfer fees or not.
The schedule 2 (para 2) of the CGST Act provides that with respect to transactions relating to land and buildings, any lease, tenancy, easement, license to occupy the land, letting out of a building including a commercial, industrial or residential complex for business or commerce is the supply of services.
This simply means that benefits arising from land mentioned above will be treated as supply of service for the purpose of GST Act and are not treated as transactions in immovable property.
Now the query arises that whether the activity of assignment of leasehold right in factory can be considered as sub- leasing so as to attract GST?
It was observed that the West Bengal Industrial Development Corporation has no title or ownership on immovable property which is central to sale of any immovable property within the meaning of Transfer of Property Act, 1882. The activity of assignment is in the nature of agreeing to transfer one’s leasehold rights which does not amount to further sub-leasing. The observed things are that it does not create any fresh benefit from land other than the leasehold right. This is to considered as compensation for agreeing to do the transfer of rights in favour of the assignee.

Thus this clarifies to be a service under ‘Other Miscellaneous services’ and liable to 18% GST. Furthermore, it was held that as GST is payable on the activity of assignment of leasehold right in immovable property, the ITC of tax paid on transfer fee is admissible to the applicant.

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Assignment of Leasehold Rights on Land – Critical analysis

Last Updated
June 2, 2023

Leasehold rights on land play a crucial role in various real estate transactions and business operations. Many units are set up on leasehold land provided by state industrial development corporation.

What Is Assignment Of Leasehold Rights?

The assignment of leasehold rights on land refers to the transfer of the leasehold interest or rights from one party to another.
It involves the transfer of the rights and obligations associated with a lease agreement from the original lessee (assignor) to a new party (assignee).

Leasehold rights on land typically arise when a lessee enters into a lease agreement with the lessor to use and occupy the land for a specific period, usually for commercial, industrial, or residential purposes. The lessee holds the leasehold rights, which include the right to possess and use the land within the terms and conditions outlined in the lease agreement.

However, there may be situations where the original lessee, for various reasons, decides to transfer or assign their leasehold rights to another party for consideration. This can occur when the lessee wants to exit the lease, restructure their business operations, or transfer the lease to a new owner.

The assignment of leasehold rights involves a formal agreement between the assignor and assignee that outlines the terms of the transfer. The assignor relinquishes their rights and responsibilities as the original lessee, while the assignee assumes those rights and obligations for the remaining lease term.

It is important to note that the assignment of leasehold rights does not necessarily involve the transfer of ownership of the land itself. The assignee steps into the shoes of the original lessee and continues to hold the leasehold interest for the remaining term specified in the lease agreement.

The assignment of leasehold rights on land can have various legal, financial, and operational implications for both the assignor and assignee. It is crucial for all parties involved to carefully review the terms of the lease agreement, understand their rights and obligations, and ensure compliance with any legal or regulatory requirements related to the assignment.

Income Tax Implication

Lease hold rights is a capital asset as per Section 2(14) of the Income Tax Act,1961 and Assignment of lease hold rights falls under definition of transfer u/sec. 2(47) of the Income Tax Act by way of relinquishment of rights in Immovable property.

Assignment as discussed herewith results into capital gain tax implication u/sec. 45 of Income Tax Act.
Leased Land Property assigned for a consideration is cost of Acquisition for the capital purpose. Holding period of Lease beyond 3 years is considered as long-term Capital Asset and tax rate applicable is 20% plus applicable surcharge and cess. Short term capital Asset has holding period less than 3 years and normal rate of tax would be applicable.
Further, since the Lease hold right is neither a Land nor Building, provisions of Section 50C, which deems the Stamp Duty Value as Consideration in case if the actual consideration is less than Stamp Duty Value shall not apply.
Wherein Capital Gains on Land is liable to be taxed as Long Term Capital Gains and Capital Gains on Structure is liable to tax short term capital gain.
Other view is Entire Gains on Transaction is treated as short term capital gain.

GST Implications

The Goods and Services Tax (GST), introduced in India in 2017, has brought significant changes to the taxation system. It is important to understand the implications of GST on the assignment of leasehold rights on land and how it affects different stakeholders involved.

As per Section 7(1) of the CGST Act, 2017, supply” includes:

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. Thus, under the GST regime, leasehold rights on land can be considered as a supply of services and thereby subject to taxation.

Upfront amount called as premium, salami, cost, price, development charges or by any other name payable in respect of long term lease of 30 years, or more of industrial plots or infrastructure development plots for financial business, provided by the State Government Industrial Development Corporations or Undertakings or by any other entity having 50 % or more ownership of Central Government, State Government, Union territory to the industrial units or the developers in any industrial or financial business area subject to following conditions:

the leased plots shall be used for industrial or financial activity in an industrial or financial business area
the State Government shall monitor and enforce the condition as per the order issued by the State Government
in case of any violation or subsequent change of land use, the original lessor, original lessee as well as any subsequent lessee or buyer or owner shall be jointly and severally liable to pay tax along with the applicable interest and penalty
the lease agreement entered shall incorporate in the terms and conditions that the tax was exempted on the long term lease of the plots by the original lessor to the original lessee subject to above condition and the parties to the said agreements undertake to comply with the same.

Thus, GST on assignment of lease hold rights has been classified as exempt only if it falls within the ambit of above entry satisfying all the conditions.

Contradictory View

As per Section 7(2)(a) of the CGST Act 2017 read along with Entry no. 5 of Schedule III, sale of land is treated neither as supply of goods nor as supply of services.

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 can be construed as benefit arising from land, thereby treating the same as Immovable Property or Land itself for the purpose of Registration Act attracting Stamp Duty and registration charges. Thus, as per State Governments, the assignment of leasehold rights on land is considered as a transfer of ownership for state revenue purposes.

Irony created due to non-alignment of definition of Assignment of Lease hold rights under Registration Act and GST leading to double taxation as the individuals or businesses involved in the assignment of leasehold rights on land must comply with both the state revenue requirements, such as stamp duty and the GST obligations.

It is important to note that under the erstwhile service tax regime in India, the assignment of leasehold rights on land was specifically listed as an exempted service. This means that no service tax was applicable on such assignments, regardless of the purpose of the lease (residential, commercial, or industrial). The exemption from service tax on the assignment of leasehold rights was provided to avoid double taxation since the leasehold rights were considered immovable property, and the transfer of immovable property was already subject to other taxes, such as stamp duty.

Burning Issue In MIDC Areas For GST Matter

Thousands of units in Maharashtra including Thane, Navi Mumbai, Pune, Nagpur etc have not paid GST on assignment of lease considering this as sale of land and assuming that the exemption under Sr. No. 41 of notification No. 12/2017 dated 28.06.2017 would be available to them. However, it does not cover subsequent transfers of lease premium on assignment of leasehold right.

Also, there are many GST Advance Rulings stating that long term lease cannot be equivalent to sale of land and would be taxable under the GST law, thereby confirming GST on such supply.

Thus, the GST department has also started issuing notices under the CGST Act 2017 on the assignment of lease hold rights charging 18% GST on the total value of the assignment agreement.

While, the State Revenue department is considering this assignment of lease as sale of land and building and thus charging full stamp duty and registration charges accordingly.

The above contradictory views from the GST Laws and State Laws are creating multiplicity of taxes for the same transactions, which should not be viable in the eyes of the law. Thus, the government should hence analyse the situation and take pertinent action on urgent basis.

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WB AAR | Will GST be applicable for assignment of leasehold right on land? GST applicability discussed

West Bengal Authority for Advance Ruling, GST (WB AAR): A Division Bench of Susmita Bhattacharya and Parthasarathi Dey (Members) while addressing the

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West Bengal Authority for Advance Ruling, GST (WB AAR): A Division Bench of Susmita Bhattacharya and Parthasarathi Dey (Members) while addressing the present application with regard to the applicability of GST on “assignment of leasehold right” held that,

The activity of assignment is in the nature of agreeing to transfer one’s leasehold rights. It does not amount to further sub-leasing, as the applicant’s rights as per the Deed of sub-lease stands extinguished after assignment. Neither does it create fresh benefit from the land. It is in the nature of compensation for agreeing to do the transfer of the applicant’s rights in favour of the assignee. It is a service classifiable under “Other miscellaneous service‟ (SAC 999792) and taxable @ 18%.

National Company Law Tribunal, Kolkata Bench admitted the applicant as the corporate debtor and passed an order under Section 33 of the Insolvency and Bankruptcy Code, 2016 to start the process of liquidating the corporate debtor.

One of the assets under liquidation is the leasehold property unit along with care parking space (Demised Premises). West Bengal Industrial Development Corporation Ltd. granted the applicant possession of the Demised Premised for 99 years under a registered deed.

Applicant submitted that according to clause 12.28 of the deed, applicant, after the expiry of at least five years from the date of the Deed coming into force, is entitled to assign to another person the unexpired residual period of the sub-lease after taking written approval of the sub-lessor and on payment of transfer fee, being 10% of the prevailing market value of the property as assessed by the Registering Authority of the State Government.

Question for consideration:

Liquidator raised the question as to whether GST is payable on the consideration receivable on such assignment. If so, what should be the SAC and the rate applicable? He also seeks clarity on whether he can claim input tax credit for the GST paid on the transfer fee.

Officer Concerned from the Revenue submitted that the assigning of the sub-lease is a service classifiable under the heading “Other Miscellaneous Services‟ (SAC 99979) and taxed accordingly.

Observations of the Authority

Scope of supply under Section 7 (1) of the GST Act includes all forms of supply of goods and services, including a sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made.

Bench noted that the benefits arising from land in the forms specified in paragraph 2 of Schedule II are not to be treated as transactions in immovable property but as the supply of service for the purpose of the GST Act.

Deed | Service Contract of Lease

Authority stated that the Deed confers upon the applicant no better title to the Demised Premises other than a service contract of lease.

Applicant can only transfer to the assignee his right to receive the service of the lease for the unexpired period after obtaining prior approval of the Sub-lessor on payment of the transfer fee.

Conditional Possession

Hence, it is clear that the applicant, apart from the conditional possession of the Demised Premises, enjoys no title or ownership, which is central to the sale of any immovable property within the meaning of Section 54 of the Transfer of Property Act, 1882.

Therefore, the assignment does not amount to transfer of any benefit other than leasehold rights in terms of the Deed for the unexpired period of the lease and is no transfer of any immovable property in the context of the GST Act.

Thus, the activity of assignment of leasehold right is a service classifiable under ‘Other miscellaneous service‟ (SAC 999792) and taxable @ 18% under Sl No. 35 of Notification No. 11/2017 – CT (Rate) dated 28/06/2017 (State Notification No. 1135- FT dated 28/06/2017), as amended from time to time.

Further, the transfer fee charged by the Sub-lessor is in the nature of a consideration for tolerating an act that the applicant is otherwise refrained from doing in terms of clause 12.28 of the Deed. It is also a service classifiable under “Other miscellaneous service‟ (SAC 999794) and taxable @ 18% under Sl No. 35 of the Rate Notification. [Enfield Apparels Ltd. In Re., 2020 SCC OnLine WB AAR-GST 7 , decided on 10-08-2020]

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Assignment of leasehold rights for the unexpired residual period is liable to GST

2020 acr 243 aar west bengal m/s enfield apparels ltd (authority for advance rulings) ms susmita bhattacharya, joint commissioner, cgst & cx mr parthasarathi dey, additional commissioner, sgst 05/wbaar/2020-21 dated 10/08/2020.

Applicant is entitled to assign to another person the unexpired residual period of the sub-lease after taking written approval of the Sublessor and on payment of transfer fee, being 10% of the prevailing market value of the property as assessed by the Registering Authority of the State Government.

The benefits arising from land in the forms specified in paragraph 2 of Schedule II are not to be treated as transactions in immovable property but as the supply of service for the purpose of the GST Act.

Apart from the conditional possession of the Demised Premises, the applicant enjoys no title or ownership, which is central to sale of any immovable property within the meaning of section 54 of the Transfer of Property Act, 1882. The applicant’s interest in the benefits arising out of the Demised Premises is limited to sub-leasing in terms of the Deed, and he is capable of transferring the benefits only to that extent. The assignment, therefore, does not amount to transfer of any benefit other than leasehold rights in terms of the Deed for the unexpired period of the lease and is no transfer of any immovable property in the context of the GST Act.

The activity of assignment is in the nature of agreeing to transfer one’s leasehold rights. It does not amount to further sub-leasing, as the applicant’s rights as per the Deed stands extinguished. Neither does it create fresh benefit from land other than the leasehold right. It is like a compensation for agreeing to do the transfer of the applicant’s rights in favour of the assignee. It is a service classifiable under “Other miscellaneous service” (SAC 999792) and taxable @ 18% under Sl No. 35 of Notification No. 11/2017 – CT (Rate) dated 28/06/2017 (State Notification No. 1135FT dated 28/06/2017).

Similarly, the transfer fee charged by the Sub-lessor is in the nature of a consideration for tolerating an act that the applicant is otherwise refrained from doing. It is also a service classifiable under “Other miscellaneous service” (SAC 999794) and taxable @ 18% under Sl No. 35 of the Rate Notification. It is the consideration payable to the Sub-lessor for providing a service in the course or furtherance of business, more specifically because business includes supply or acquisition of goods or services in connection with the closure of a business in terms of section 2 (17) (d) of the GST Act. The GST to be paid on such transfer fee is, therefore, admissible as input tax credit.

For the applicant: Arup Dasgupta, FCA

A person within the ambit of Section 100 (1) of the Central Goods and Services Act, 2017 or West Bengal Goods and Services Act, 2017 (hereinafter collectively called “the GST Act”), if aggrieved by this Ruling, may appeal against it before the West Bengal Appellate Authority for Advance Ruling, constituted under Section 99 of the West Bengal Goods and Services Act, 2017, within thirty days from the date of communication of this Ruling, or within such further time as mentioned in the proviso to Section 100 (2) of the GST Act.

Every such appeal shall be filed in accordance with Section 100 (3) of the GST Act and the Rules prescribed thereunder, and the Regulations prescribed by the West Bengal Authority for Advance Ruling Regulations, 2018.

Admissibility of the Application

1.1 The National Company Law Tribunal (hereinafter NCLT), Kolkata Bench, passed an order on 06/08/2018, initiating the corporate insolvency resolution process (hereinafter CIRP), admitting the applicant as the corporate debtor, and appointed Sri Kanchan Duatta as Interim Resolution Professional (IRP). The Committee of Creditors (hereinafter CoC) subsequently confirmed Sri Dutta as the Resolution Professional (RP). During the CIRP, the RP and the CoC did not receive any resolution plan. The NCLT, therefore, passed another order on 04/04/2019 under section 33 of the Insolvency & Bankruptcy Code, 2016 (hereinafter the IBC) to start the process of liquidating the corporate debtor and appointed Sri Dutta as the Liquidator. He has obtained separate registration as a distinct person (GSTIN 19AABCE8762F4ZC) in terms of Notification No. 11/2020 – Central Tax dated 21/03/2020).

1.2 One of the assets under liquidation is the leasehold factory unit along with car parking space situated at Paridhan Garment Park at 19 Canal South Road, Kolkata – 700015 (hereinafter the Demised Premises). The West Bengal Industrial Development Corporation Ltd (hereafter the Sub-lessor) granted the applicant possession of the Demised Premises for ninety-nine years under a registered deed of sub-lease dated 06/08/2010 (hereinafter the Deed) on payment of an up-front premium of Rs 5.07 crore and monthly lease rental of Rs 21,000/-. According to clause 12.28 of the Deed, the applicant, after the expiry of at least five years from the date of the Deed coming into force, is entitled to assign to another person the unexpired residual period of the sub-lease after taking written approval of the Sublessor and on payment of transfer fee, being 10% of the prevailing market value of the property as assessed by the Registering Authority of the State Government.

1.3 The Liquidator wants to know whether GST is payable on the consideration receivable on such assignment. If so, what should be the SAC and the rate applicable? He also seeks clarity on whether he can claim input tax credit for the GST paid on the transfer fee. Both the questions are admissible under section 97 (2) (a), (b), (d) & (e) of the GST Act.

1.4 The applicant declares that the questions raised are not pending before or disposed of by any authority in any proceedings under the GST Act. The concerned officer from the revenue does not object to the admission of the application. The application is, therefore, admitted.

Submissions of the Applicant

2.1The applicant submits that leasehold right to immovable property is an immovable property. He refers to section 3 (26) of the General Clauses Act, 1897, which defines immovable property to include land, benefits to arise out of the land and things attached to the earth, or permanently fastened to anything attached to the earth. The phrase „benefits to arise out of land‟ is relevant. According to the applicant, it means the interest in land. Even the transfer of development rights in the land through joint development is treated as the sale of land. The applicant refers to several case laws in support of his argument [Mati Lal Daga and Ors vs (Sri Sri) Iswar Radha Damodar, AIR 1936 Cal 727; Girnar Traders vs State of Maharashtra, (2011) 3 SCC 1; Chheda Housing Development vs Bibijan Shaikh Farid and Ors, (2007) 3 MhLJ 402].

2.2 The applicant, therefore, concludes that lease simpliciter alone should attract levy of GST. Assignment of leasehold rights on land, on the other hand, is nothing but the transfer of immovable property akin to the sale of land and buildings, and no GST is leviable on such assignments. “Sale” means the transfer of property or title for a price. Assignment of the leasehold rights effectively transfers possession and title to the assignee for a price. It is nothing but a sale of the building.

2.3 At this point the applicant tries to distinguish his case from the judgments in Builders Association of Navi Mumbai [(2018) 12 GSTL 232 (Bom)] and Greater Noida Industrial Development Authority [(2015) 40 STR 95]. He contends that the High Courts in the above cases have dealt with leasing, which is different from the assignment of leasehold rights. The rulings pronounced based on those two judgments [Greentech Mega Food Park Pvt Ltd, (2019) 27 GSTL 143 (AAR, Rajasthan) and Goa Tourism Development Corporation Ltd, (2018) 19 GSTL 700 (AAR, Goa)], therefore, are not tenable.

2.4 The applicant now draws attention to the question of admissibility of the input tax credit, being the GST to be paid on the transfer fee. According to the applicant, such transfer fee is the consideration payable to the Sub-lessor for rendering service in the course or furtherance of business, more specifically because business includes in terms of section 2 (17) (d) of the GST Act supply or acquisition of goods or services in connection with the closure of a business. The applicant, therefore, argues that GST to be paid on such transfer fee is admissible as input tax credit in the event it is ruled that the assignment of leasehold right is a supply of taxable service.

Submissions of the concerned officer from the revenue

3.1 The applicant’s argument described in paragraphs 2.1 to 2.3 above is not discussed in the submissions of the concerned officer from the revenue. He submits that the assigning of the sub-lease is a service classifiable under the heading “Other Miscellaneous Services” (SAC 99979) and taxed accordingly.

4. Observations and findings of the Authority

4.1 Section 3(26) of the General Clauses Act, 1897 defines “immovable property” as to include land, benefits to arise out of the land , and things attached to the earth, or permanently fastened to anything attached to the earth. Applicability of the General Clauses Act, 1897 in the context of a Special Act like the CGST Act, 2017, however, is limited to areas where no express provisions are made under the said Special Act.

4.2 Scope of supply under section 7 (1) of the GST Act includes all forms of supply of goods and services, including a sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made. Section 7 (1A) read with Schedule II under the GST Act provides which of such supplies shall be treated as supply of goods or services. Paragraph 2 of Schedule II provides that with respect to transactions relating to land and buildings, any lease, tenancy, easement, license to occupy the land, letting out of a building including a commercial, industrial or residential complex for business or commerce is the supply of services. In other words, benefits arising from land in the forms specified in paragraph 2 of Schedule II are not to be treated as transactions in immovable property but as the supply of service for the purpose of the GST Act. The Deed, therefore, confers upon the applicant no better title to the Demised Premises other than a service contract of lease. He can, therefore, transfer to the assignee only his right to receive the service of the lease for the unexpired period after obtaining prior approval of the Sub-lessor on payment of the transfer fee.

4.3 Clause 11 of the Deed provides the rights of the Sub-lessee. They include the right to have peaceful possession of the Demised Premises on regular payment of the lease rental and compliance to the conditions and restrictions enumerated under clause 12 of the Deed. A conjoint reading of the two clauses makes it clear that the Sub-lessor allows the applicant possession of the Demised Premises for the manufacture of garments and textiles. The Demised Premises shall not be used for residential use or any unlawful activity, nor shall be structurally altered in any way. The sub-lease may be terminated if the Sub-lessee fails to pay the lease rental or maintenance charges, fails or delays in commencing commercial operation, discontinues the business, fails to maintain good labour practice or breaches any terms of the Deed.

4.4 It is evident from the above discussion that the applicant, apart from the conditional possession of the Demised Premises, enjoys no title or ownership, which is central to sale of any immovable property within the meaning of section 54 of the Transfer of Property Act, 1882. The applicant’s interest in the benefits arising out of the Demised Premises is limited to sub-leasing in terms of the Deed, and he is capable of transferring the benefits only to that extent. The assignment, therefore, does not amount to transfer of any benefit other than leasehold rights in terms of the Deed for the unexpired period of the lease and is no transfer of any immovable property in the context of the GST Act.

4.5 The applicant’s reference to the case laws where joint development right is treated as the sale of an immovable property (refer to para 2.1 above) needs to be distinguished. None of those cases is decided in the context of the GST Act, where the provisions of paragraph 2 of Schedule II curve out certain benefits arising out of the land from the realm of immovable property and treat them as “service” for the purpose of the GST Act. The reference to the above case laws is, therefore, not relevant.

4.6 The activity of assignment is in the nature of agreeing to transfer one’s leasehold rights. It does not amount to further sub-leasing, as the applicant’s rights as per the Deed stands extinguished. Neither does it create fresh benefit from land other than the leasehold right. It is like a compensation for agreeing to do the transfer of the applicant’s rights in favour of the assignee. It is a service classifiable under “Other miscellaneous service” (SAC 999792) and taxable @ 18% under Sl No. 35 of Notification No. 11/2017 – CT (Rate) dated 28/06/2017 (State Notification No. 1135FT dated 28/06/2017), as amended from time to time (hereinafter collectively called the Rate Notification).

4.7 Similarly, the transfer fee charged by the Sub-lessor is in the nature of a consideration for tolerating an act that the applicant is otherwise refrained from doing in terms of clause 12.28 of the Deed. It is also a service classifiable under “Other miscellaneous service” (SAC 999794) and taxable @ 18% under Sl No. 35 of the Rate Notification. It is the consideration payable to the Sub-lessor for providing a service in the course or furtherance of business, more specifically because business includes supply or acquisition of goods or services in connection with the closure of a business in terms of section 2 (17) (d) of the GST Act. The GST to be paid on such transfer fee is, therefore, admissible as input tax credit.

Based on the above discussion, we rule as under,

The activity of assignment is in the nature of agreeing to transfer one’s leasehold rights. It does not amount to further sub-leasing, as the applicant’s rights as per the Deed of sub-lease stands extinguished after assignment. Neither does it create fresh benefit from the land. It is in the nature of compensation for agreeing to do the transfer of the applicant’s rights in favour of the assignee. It is a service classifiable under “Other miscellaneous service” (SAC 999792) and taxable @ 18% under Sl No. 35 of Notification No. 11/2017 – CT (Rate) dated 28/06/2017 (State Notification No.1135-FT dated 28/06/2017), as amended from time to time.

The transfer fee charged by the Sub-lessor is the consideration payable to the Sublessor for providing a service in the course or furtherance of business, more specifically because business includes supply or acquisition of goods or services in connection with the closure of a business in terms of section 2 (17) (d) of the GST Act. The GST to be paid on such transfer fee is, therefore, admissible as input tax credit.

This Ruling is valid subject to the provisions under Section 103 until and unless declared void under Section 104(1) of the GST Act.

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Constitutional Validity of GST on Lease/Rent Payments – Supreme Court settles the Jurisprudence

The constitutional validity of imposition of goods and services sax (“ GST” ) on lease/ rent payments have been challenged in various courts in India. In the matter Myrayash Hotels Private Limited vs. The Union of India [1] , the petitioner had filed a writ petition before the High Court of Bombay challenging the constitutional validity of paragraph 2 and paragraph 5(a) of Schedule II of the Goods and Services Tax Act, 2017 (“ GST Act” ) and Goa Goods and Services Tax Act, 2017. In the said matter, the petitioner contended that in case of transactions related to lease/ rent, which involves non-provision of services, GST cannot be levied on the same under Article 246A of the Constitution of India (“ COI” ). It was further contended by the petitioner that only the state legislatures have power to impose tax on transactions related to immovable properties as set out under Entry 49 List II of the Seventh Schedule [2] of the COI.

The Hight Court of Bombay, while referring to another case viz. Retailers Association of India (RAI) vs. Union of India & Ors. [3] , dismissed the aforesaid writ petition and observed that the judgement delivered in Retailers Association of India (RAI) was rendered in the context of service tax and therefore the principle laid down therein will also apply insofar as GST is concerned. In the said matter, the High Court of Bombay held that the legislative basis of imposing services tax in the leasing transaction cannot be questioned and also since the service tax was imposed under the Entry 97 of List I of Seventh Schedule of the COI [4] .

The petitioner in Myrayash Hotels Private Limited challenged the aforesaid order passed by the High Court of Bombay and also challenged the constitutional validity of levy of GST on lease/ rent payments and subsequently filed a special leave petition [5] (“ SLP” ) before the Hon’ble Supreme Court of India (“ SC” ). The SC, while admitting the appeal, directed the appeal to be listed before 9 SC Judges (“ Bench” ) and tagged the matter with Civil Appeal No. 4487 of 2010 [6] . It may be noted that in the said Civil Appeal, the SC vide its order dated April 5, 2018 directed, that since the scope of Entry 49 List II of the Seventh Schedule of the COI is pending before the Bench, the matters related to service tax are also to be listed before the said Bench.

SCOPE OF ENTRY 49 LIST II OF THE SEVENTH SCHEDULE OF THE COI AND RESIDUARY POWER OF THE PARLIAMENT

The Central Government under Article 246A of the COI enacted GST Act, whereby GST is levied on goods and services. As per paragraph 2 and paragraph 5(a) of the Schedule II of the GST Act, (i) any lease, tenancy, easement, license to occupy land; (ii) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly; and (iii) any renting of immovable property is ‘supply of services’ and thus, GST is leviable on such activities.

In Union of India vs. H.S. Dhillion [7] , the SC summarized the ambit of expression ‘ tax on lands and buildings ‘ under Entry 49 of List II of the COI as follows: (i) it should be on units i.e. land and building as separate units; (ii) the tax cannot be a tax on totality i.e. not a composite tax on value of all land and buildings; and (iii) tax is not concerned with division of interest in the building or land. The SC held that tax under Entry 49 of List II is not a personal tax, but a tax on property. With respect to residuary power of the Parliament, the SC held that it is as much a power as conferred to the Parliament under Article 246 of the COI.

JUDICIAL PRONOUNCEMENTS.

The High Courts of Bombay and Delhi have upheld the constitutional validity of levy of GST on leasing transaction and on appeals by petitioners the SC has admitted appeals against such orders/ judgments. It is pertinent to note that various courts including SC have delivered judgements on the constitutional validity of levy of service tax on the leasing transaction (principle therein may apply to GST as has been held in Myrayash Hotels Private Limited ) and 2 contrary views have been taken by the courts while determining the issue. In State of West Bengal vs. Kesoram Industries Ltd [8] , it was held that Entry 49 of List II would include all types of taxes imposed on lands and buildings and same would fall within the exclusive authority of the state legislature and in no manner fall within Entry 97 of List I, by virtue of which Parliament can legislate. In Home Solutions Retail India Ltd. vs. Union of India [9] , it was held by the division bench of the High Court of Delhi that the renting of immovable property for furtherance of business of commerce by itself does not entail any value addition, and therefore cannot be regarded as a service. Reliance was made on judgement of All India Federation of Tax Practitioners & Ors vs. Union of India & Ors [10] , wherein it was held that for imposition for service tax, there should be a value addition for rendering of services and thus, no service tax is leviable on the same and any enactment imposing such tax on leasing transaction would be unconstitutional and ultra vires.

Another view was taken by the High Court of Delhi, in Home Solutions Retail India Ltd. vs. Union of India [11] , wherein the High Court of Delhi rejected the view taken by the division bench in Home Solutions Retail above and observed that a tax levied on activity or service rendered related to the land or building would fall under the category of tax on land and building and levy of service tax on a particular kind of services cannot be struck down on the ground that it does not conform to a common understanding of word ‘service’. The court held that imposition of service tax is not a tax on land and building as enumerated under Entry 49 of List II, what is being taxed is an activity, which implies letting and leasing the immovable property for commercial and business purpose and its furtherance. It was further held that when a premises is leased for commercial purposes, it is basically for purpose of facilitating commerce, business and promoting the same, thus an element of value addition is involved therein. Once there is a value addition, there is an element of service, service tax gets attracted and the imposition of such service tax/ GST gets out of the purview of Entry 49 of List II and falls under the residuary entry, i.e. Entry 97 of List I.

The SC while hearing the SLP and Civil Appeal No. 4487 of 2010 has directed that since the scope of Entry 49 List II of the Seventh Schedule of the COI is pending before the Bench in the matter of Mineral Area Development Authority and Others vs. Steel Authority of India and Others [12] , which specifically dealt with “ Whether the majority decision in Kesoram Industries Limited could be read as departing from the law laid down in the seven-Judge Bench decision in India Cement Ltd. vs. State of Tamil Nadu and Whether “taxes on lands and buildings” in List II Entry 49 of the Seventh Schedule to the Constitution contemplate a tax levied directly on the land as unit having definite relationship with the land? … “. The SC accordingly held that it is of the opinion that these matters should await the decision of the Bench whereafter the hearing of these matters will be taken up once again in the course of which it will be open for the parties to urge such additional points as may be considered relevant. The SLP was deferred until disposal of the issues pending before the Bench in Mineral Area Development Authority and Others . The SC further clarified that there is no stay against the recovery and it will be open for the revenue authority to recover the tax in accordance with law and on its own merits.

THE WAY FORWARD

Owing to the conflicting orders/ judgments passed by courts in India over the years wherein one view is that in a leasing transaction there being no services provided, GST should not be imposed. Another view taken is that tax imposed on land and building is based on the total value of the property, which is covered under Entry 49 of List II and the service tax imposed on leasing transaction is a separate tax imposed on the value addition, which entails in a leasing transaction.

As most of the judicial pronouncements relate to service tax and not specifically deals with GST, the decision of the Bench on the scope of Entry 49 of List II would be a landmark judgement, which could bring a closure to the debate on the constitutional validity of levy of GST on lease/ rent payments.

[1] Writ Petition No. 715 of 2019. [2] Taxes on lands and buildings. [3] 2011 (187) ECR 0039 (Bombay). [4] Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists. [5] SLP No. 6080 of 2022. [6] Union of India and Others. vs. UTV News Ltd., Civil Appeal No. 4487/2010. [7] AIR 1972 SC 1061. [8] (2004) 10 SCC 20. [9] 158 2009 DLT 722 (DB). [10] (2007) 7 SCC 527. [11] WP (C) No. 3398/2010. [12] (2011) 4 SCC 450.

AUTHORS & CONTRIBUTORS

Hardeep Sachdeva

Nupur Singh

These are the views and opinions of the author(s) and do not necessarily reflect the views of the Firm. This article is intended for general information only and does not constitute legal or other advice and you acknowledge that there is no relationship (implied, legal or fiduciary) between you and the author/AZB. AZB does not claim that the article's content or information is accurate, correct or complete, and disclaims all liability for any loss or damage caused through error or omission.

18% GST applicable on Assignment of Leasehold Right on Land: AAR [Read Order]

GST - AAR - Leasehold Right - Assignment - Taxscan

The West Bengal Authority of Advance Ruling (AAR) ruled that assignment of leasehold right on land is taxable at the rate of 18% under GST.

The NCLT passed an order, initiating the corporate insolvency resolution process (CIRP), admitting the applicant as the corporate debtor, and appointed Kanchan Duatta as Interim Resolution Professional (IRP). The Committee of Creditors (CoC) subsequently confirmed Dutta as the Resolution Professional (RP).

During the CIRP , the RP and the CoC did not receive any resolution plan. The NCLT , therefore, passed another order under section 33 of the Insolvency & Bankruptcy Code, 2016 (IBC) to start the process of liquidating the corporate debtor and appointed Sri Dutta as the Liquidator. He has obtained separate registration as a distinct person in terms of Notification No. 11/2020 – Central Tax dated March 21, 2020.

One of the assets under liquidation is the leasehold factory unit along with car parking space. The West Bengal Industrial Development Corporation Ltd granted the applicant possession of the Demised Premises for 99 years under a registered deed of sub-lease on payment of an up-front premium of Rs 5.07 crore and monthly lease rental of Rs 21,000.

According to clause 12.28 of the Deed, the applicant, after the expiry of at least 5 years from the date of the Deed coming into force, is entitled to assign to another person the unexpired residual period of the sub-lease after taking written approval of the Sub-lessor and on payment of transfer fee, being 10% of the prevailing market value of the property as assessed by the Registering Authority of the State Government.

The Liquidator sought advance ruling on the issue whether GST is payable on the consideration receivable on such assignment. If so, what should be the SAC and the rate applicable.

The other issue raised was whether he can claim input tax credit for the GST paid on the transfer fee.

The two member bench of Susmita Bhattacharya and Parthsarthi Dey ruled that the activity of assignment is in the nature of agreeing to transfer one’s leasehold rights. It does not amount to further sub-leasing, as the applicant’s rights as per the Deed of sub-lease stands extinguished after assignment.

The AAR further ruled that neither does it create fresh benefit from the land. It is in the nature of compensation for agreeing to do the transfer of the applicant’s rights in favour of the assignee. It is a service classifiable under ‘Other miscellaneous service’ (SAC 999792) and taxable at the rate of 18% under Sl No. 35 of Notification No. 11/2017 – CT (Rate) dated June 28, 2017.

The Authority further ruled that the transfer fee charged by the Sub-lessor is the consideration payable to the Sublessor for providing a service in the course or furtherance of business, more specifically because business includes supply or acquisition of goods or services in connection with the closure of a business in terms of section 2 (17) (d) of the GST Act. The GST to be paid on such transfer fee is, therefore, admissible as input tax credit .

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GST on Lease/Rental Transactions

A lease is a contractual arrangement between owner (lessor) & user (lessee) whereby one party, the lessor, grants the right to use a particular assets (such as a parcel of land, building, equipment, or machinery etc.) for a specific period and under specified conditions to the other party, the lessee.

Leases are broadly classified into two categories:

1. Finance Lease

Finance lease is relatively for a longer period which is sufficient to amortize the capital invested by the lessor (owner) & leave some profit. It involves the transfer of all risk & rewards associated with the ownership of assets to the lessee but the title may or may not be transferred at the end of lease period.

2. Operating Lease/Service lease/Maintenance lease

Operating lease is relatively for a short period of time. The lease period is shorter than economic life of the assets. Operating lease require the lessor to maintain & service the leased assets.

As per Sec 7 of the CGST Act, 2017, the expression supply includes 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.

GST does not differentiate between Finance & Operating leases. The time of supply of lease depends upon whether "transfer of title" involves in the lease transactions or not.

a) If the lease agreement stipulates transfer of title: Supply of goods

b) If the lease agreement does not stipulate transfer of title: Supply of services

As per Sl No. 5 of Schedule II of CGST Act, 2017 any lease, tenancy, easement, license to occupy land is a supply of services. However, as per Sl No. 5 of Schedule III , Sale of land is neither supply of goods nor services. GST paid on lease rent is eligible for ITC, as it is not covered in the list of blocked credit u/s 17(5).


01	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.	Nil Rate Entry No.41 of Exemption Notification No.12/2017 Dated 28.06.2017
02	Service by way of granting of long term lease of thirty years, or more, on or after 01.04.2019, for construction of residential apartments by a promoter in a project, intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.	Nil Rate Entry No.41-B of Exemption Notification No.12/2017 Dated 28.06.2017
03	Renting or leasing of agro machinery or vacant land with or without a structure incidental to its use for cultivation or agricultural produce.	Nil Rate Entry No.54(d) of Exemption notification No.12/2017 Dated 28.06.2017
04	Long term lease of land (30 years or more) by any person against consideration in the form of 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	18 % Taxable under RCM under entry No.5C
05	Renting /leasing of immovable property by the Central Government, State Government, Union territory or local authority to a registered person	18 % Taxable under RCM under entry No.5A
06	Leasing/ renting of vacant land by any person for commercial purpose (other than 1 to 5 above)	18 % under forward charge
07	Renting/leasing of residential dwelling to a registered person by any person	18 % Taxable under RCM under entry No.5AA ( N.No.04/2022-CT(R) Dt. 13-07-2022 )
07-A	Renting/leasing of property for commercial purpose by an un-registered person to a registered person	18 % Taxable under RCM -54th GST Council meeting
08	Renting/leasing of residential dwelling to an un-registered person by a registered person for use as residence	Exempted Entry No.12 of Exemption notification No.12/2017 Dated 28.06.2017
09	Renting/leasing of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient, provided to a body corporate.	5% Taxable under RCM under entry No.15 in the hands of Body corporate
10	Renting/leasing of any motor vehicle designed to carry passengers where the cost of fuel is not included in the consideration charged from the service recipient	18%
11	Renting of vehicles to State Transport Undertakings and Local Authorities	Nil Entry No.22 of Exemption notification No.12/2017 Dated 28.06.2017
12	Renting/leasing of vehicles by State Transport Undertakings to any person	18% under forward charge
13	Renting/leasing of vehicles by Central Government , State Government or local authority to a business entity Note. Transportation of goods or services by Central Government , State Government or local authority covered under forward charge.	18% under Reverse charge Taxable under RCM under entry No.5 ( N.No. 13/2017-CT(R) Dated 28-06-2017 )
14	Renting/leasing of vehicles to Government department other than State Transport Undertakings	18% under forward charge
15	Transfer of right to use any goods for any purpose (whether or not for a specified period)	Same rate of GST and compensation cess as applicable on supply of similar goods
16	Any transfer of right in goods or of undivided share in goods without the transfer of title thereof	Same rate of GST and compensation cess as applicable on supply of similar goods.
17	Leasing or Rental services concerning construction Machinery and Equipment with or without Operator [ SAC 997313]	18%
18	Leasing or Rental services concerning office Machinery and Equipment (Except Computers) with or without Operator [ SAC 997314]	18%
19	Leasing or Rental services concerning Computers with or without Operators [ SAC 997315]	18%
20	Leasing or Rental Services concerning Televisions, Radios, Video Cassette Recorders, Projectors, Audio Systems and related equipment and Accessories (Home Entertainment Equipment ) [ SAC 997321]	18%
21	Leasing or Rental services concerning Furniture and other Household Appliances [ SAC 997323]	18%
22	Licensing services for the Right to Use Computer Software and Databases. [ SAC 997331]	18%
23	Licensing services for the Right to Use other Intellectual Property products and other resources N.E.C [ SAC 997339]	18%

Note: Please refer to Exemption Notification No. 12/ 2017-Central Tax (Rate), Dated 28-06-2017 and RCM Notification No. 13/ 2017-Central Tax (Rate), Dated 28-06-2017 as amended from time to time.

The author is a Fellow member of The Institute of Chartered Accountants of India, New Delhi and Fellow member of The Institute of Cost Accountants of India, Kolkata. He can be reached at [email protected]

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SUSHANTA KUMAR MISHRA (GST Consultant, Author & Blogger) Category GST Report

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December 2023

Tax implications on assignment of lease-hold rights.

INTRODUCTION

Section 105 of the Transfer of Property Act, 1882 defines a lease of immoveable property as a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specific occasions to the transferor by the transferee, who accepts the transfer on such terms.

It has been a common practice for Governments and instrumentalities acting on behalf of Governments to allot parcels of lands on long-term leases. Such typically entail a one-time upfront premium (which fairly approximates the value of the land) and a periodic nominal rent (which also in many cases is compounded and collected upfront). The lease agreements executed between the lessor and the lessee may contain restrictive covenants in terms of use of the property, however, only subject to such restrictive covenants, the lessee is entitled to free use and enjoyment of the property in his own right. Further, such lease agreements permit a free transfer of the property by the lessee to third parties subject to approvals and payment of fees.

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Tax Insights: GST/HST issues relating to the assignment of agreements to purchase newly constructed condominiums

February 01, 2021

Issue 2021-03

The combination of rising home prices and the financial stress and uncertainty created by the COVID-19 pandemic is resulting in more condominium purchasers reconsidering their acquisition. While some buyers always planned to assign their agreements of purchase and sale (APS) to a third party, many other buyers that originally intended to lease or reside in their condominium units are also assigning their APS. There are a number of reasons for this, one of which is a reduction in the demand for rental condominiums in many Canadian cities. As discussed in a recent Tax Court of Canada decision, Chen Sun v. The Queen, 2020 TCC 112, there are many Goods and Services Tax/Harmonized Sales Tax (GST/HST) issues to consider when an APS is assigned to a third party, including whether:

GST/HST is payable by the assignee on the assignment fee and the amount attributable to the deposit that was paid by the assignor to the builder of the property
the assignee is eligible to claim the GST/HST new housing rebate
the new housing rebate can be assigned to the builder and credited against the purchase price

Is the assignment of an APS a taxable supply

The assignment of an APS will constitute a taxable supply, unless it qualifies for an exemption. This is because “real property” is defined to include an interest in real property, and the making of a supply of real property (other than an exempt supply) is deemed to be made in the course of a “commercial activity.” The sale of an interest in a residential complex by a person that is not a “builder” is generally exempt; however, the sale of an interest in a new home or condominium is generally subject to GST/HST when the assignor is a “builder.”

A “builder” is defined in a manner which can potentially include someone that is merely entering into an APS with a builder. For example, subject to a specific exclusion that only applies to individuals, someone that acquires an interest in a home before it is occupied (or a condominium before it is registered) can be a builder if their primary purpose was to either:

sell the home to any person
lease the home to someone other than an individual for their personal use

Individuals are excluded from being a builder if they did not acquire their interest in the course of a business or an adventure or concern in the nature of trade, which is determined by considering the following factors:

nature of the property sold
length of period of ownership
frequency or number of other similar transactions by the taxpayer
work expended on or in connection with the property realized
circumstances that were responsible for the sale of the property
taxpayer’s motive or intention

To the extent that the assignor is a “builder,” GST/HST will be payable on the value of consideration that is paid by the assignee and the assignor will be required to collect GST/HST unless the assignee is registered for GST/HST.

The Canada Revenue Agency (CRA) considers an amount paid by an assignee on account of the assignor’s deposit to be part of the consideration paid for the assignment of an APS, and is therefore subject to GST/HST if the assignor is a builder. Accordingly, unless the assignment is restructured to result in the builder refunding the deposit to the assignor and receiving a replacement deposit from the assignee, the assignee may pay double tax on the deposit. It is also important to note that the Tax Court of Canada’s decision in Casa Blanca Homes Ltd. v. The Queen, 2013 TCC 338 contradicts the CRA’s view. In Casa Blanca Homes Ltd., the Tax Court of Canada held that the amount paid to the assignor relating to the deposit constituted an exempt supply of a financial service and would therefore not be subject to GST/HST.

Can the assignee claim the GST/HST new housing rebate

The assignment of an APS may also impact the assignee’s eligibility to claim the new housing rebate, as evidenced by the Tax Court of Canada’s recent decision in Chen Sun. The federal new housing rebate is equal to 36% of the federal component of GST/HST paid, up to a maximum of $6,300 (for homes valued at $350,000), with the rebate being gradually reduced and phased out when the value of the home reaches $450,000. For properties in Ontario, the provincial new housing rebate is equal to 75% of the provincial component of GST/HST paid, up to a maximum of $24,000 (for homes valued at $400,000 or higher).

For a purchaser to be eligible for the new housing rebate, the following conditions must be met:

the purchaser must be an individual that is acquiring the home from a builder, as opposed to an assignor who may not be a builder
at the time the individual becomes liable or assumes liability, they must acquire the home as their primary place of residence or that of a relation
ownership of the property must be transferred to the individual after construction is substantially completed
the first person to occupy the home must be the individual or a relation
all persons named on the APS must meet the aforementioned conditions

When the purchaser qualifies for the new housing rebate, the builder is generally entitled to pay or credit the rebate amount to the purchaser pursuant to subsection 254(4) of the Excise Tax Act.

In situations where a third party is acquiring ownership of a home or condominium and they receive title directly from the builder, it does not necessarily mean that the APS has been assigned to the third party and that the builder has sold the condominium to the assignee. As argued by the Crown in Chen Sun, if the builder has not accepted the assignment, then the assignee may not be the person that is acquiring the condominium from the builder. Fortunately, in Chen Sun, the court ultimately held that the APS was in fact assigned on the basis that the builder, by its conduct, accepted the assignment and therefore the builder did sell the condominium directly to the assignee. Accordingly, the assignee was eligible to claim the new housing rebate (and the builder was entitled to credit the assignee with the rebate) because the assignee acquired the condominium from the builder and the other conditions to claim the rebate were satisfied.

How should builders deal with assignments

As the builder and purchaser are jointly and severally liable for housing rebates that have been claimed in error, it is important for builders to make sure that purchasers qualify for the rebate before they pay or credit the purchaser with the rebate. The CRA heavily scrutinizes rebate claims and, to the extent each and every condition to claim the rebate is not satisfied, the CRA will deny the rebate claim. In situations where an APS has been assigned, builders should consider whether:

they should credit the assignee with the housing rebate or advise the assignee to file the rebate claim directly with the CRA
it is easier to “tear” up the original APS and enter into a new APS with the assignee
the assignment has been clearly documented so that there is no dispute that the assignee has become the purchaser under the APS, which may not be the case when only the title is transferred to the assignee at the assignor’s direction

The takeaway

All parties to a transaction in which an APS is being assigned and a housing rebate is being claimed should consider the GST/HST implications of the assignment. Failure to structure these assignments in an appropriate manner can significantly increase GST/HST costs for the respective parties, including:

builders being assessed penalties for erroneously crediting the housing rebate to assignees
assignors being assessed penalties for failing to collect tax on the assignments
assignees paying GST/HST on the replacement deposits

PwC can help structure these assignments in a tax-efficient manner.

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GoM Meeting Update: No Further Exemption In GST For Long Term Land Lease; Here's What To Know!

The Group of Ministers (GoM) of GST Council has announced no further exemption in GST for long term land lease, in its latest meeting for real estate sector that was held in Goa. Apart from GST rates, the ministers also discussed other issues like tax norms of construction services by housing societies, definition of affordable housing among others. The decision comes at a time when real estate industry is seeking to avail deduction towards value of land on actual basis.

On the latest development, Gyanendra Tripathi, Partner & Leader (West), Indirect Tax, BDO India said, Under the present provisions, for levy of GST in case of sale of an under-construction property, a flat one third deduction from value is given to compute GST liability. However, in many metro cities, the land cost for a developer is much more than one third of the overall apartment cost and a flat one third deduction leads to indirectly levying GST even on the part of the land cost.

GoM Meet Update: No Further Exemption In GST For Real Estate; Key Highlights

Tripathi further explained that it has been a standing demand of the industry to consider giving location-based deduction towards land value (e.g. higher deduction in metro cities like Mumbai, Delhi etc and comparatively lower deduction in say, tier 2-3 cities), to adequately reflect the value of land. The industry is also seeking to avail deduction towards value of land on actual basis, where such cost is clearly available. The deduction of value of land on actual basis has been permitted by the Gujarat High Court and now the issue is pending in the Supreme Court.

Also, he said, the taxability of Joint Development Agreements (JDAs) and Transfer of Development Rights (TDRs) has been a subject matter of complexity due to factors such as determining the appropriate value of supply, restrictions to claim input tax credit and the ambiguity with regards to the GST implications on profit-sharing arrangements and the industry would look forward to clearly laid down norms in this regard.

The GoM said, "The issues pertaining to grant of GST (Goods and Services Tax) exemption on the long term lease of land by private entity and sector specific exemption such as for tourism purposes was discussed at length," as per PTI report.

Additionally, the report said that the Ministers unanimously agreed and recommended that no further exemption is required. GST at applicable rates will continue to be levied on the same.

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GoM meet in Goa: No further exemption in GST for long term land lease

The group of ministers also discussed other matters such as taxability of construction services by housing societies and definition of affordable housing.

The fourth meeting of the Group of Ministers on boosting the real estate sector held in Goa has decided no further exemption in GST should be granted on long term lease of land by private entity and sector specific exemption such as for tourism purposes.

Goa Chief Minister Pramod Sawant hosted the fourth meeting of the Group of Ministers on boosting the real estate sector (Representational photo)(HT File Photo)

Goa Chief Minister Pramod Sawant hosted the meeting of the Group of Ministers (GoM) on Tuesday.

Bihar Deputy Chief Minister Samrat Choudhary, Maharashtra Women and Child Development Minister Aditi Tatkare, Gujarat Finance Minister Kanubhai Mohanlal Desai, his Kerala counterpart K N Balagopal, Punjab Finance Minister Harpal Singh Cheema, Uttar Pradesh Finance Minister Suresh Kumar Khanna, central government GST officials were among those who attended the meet.

Also Read: Relief for homeowners: Realty experts welcome Centre’s decision to ease long term capital gains tax for sale of property

A media statement issued after the meeting said there were deliberations on various issues pertaining to the real estate sector.

"The issues pertaining to grant of GST (Goods and Services Tax) exemption on the long term lease of land by private entity and sector specific exemption such as for tourism purposes was discussed at length," it said.

The Group of Ministers unanimously agreed and recommended that no further exemption is required. GST at applicable rates will continue to be levied on the same, the statement said.

Also Read: Commercial property rentals now under Reverse Charge Mechanism: GST Council

There were certain other issues pertaining to taxability of supply of construction services by co-operative housing societies to its members in a new project or redevelopment projects, which were discussed comprehensively, the statement said.

"Various views emerged during the discussion and it was decided that these issues need to be deliberated further after obtaining the relevant data from the states," it said.

It was also decided that the Committee of Officers shall examine all these issues after obtaining relevant information/data from the states before taking a final decision in the next GoM meeting.

Also Read: Nirmala Sitharaman asked by broker why ‘government is taking his entire profit’. Watch her reply

On reviewing the value limit of ₹ 45 lakh for the definition of affordable residential apartment for a metropolitan region, it was decided that inputs from the states of Karnataka, West Bengal, Tamil Nadu, Uttar Pradesh, Maharashtra and Delhi need to be taken to arrive at a consensus on the issue.

The issue related to determining the value of land for arriving at the value of construction services in case of sale of apartments has been deferred for further examination, the statement said.

The next meeting of GoM is likely to be held on October 25.

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IMAGES

Lease of Land and issues in GST?
GST on Lease/Rental transactions
WB AAR
GST on Assignment of Leasehold Rights of SIDC Land
[Opinion] GST Chargeability on Assignment of Leasehold Rights
GST on Real Estate

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COMMENTS

[Opinion] GST Chargeability on Assignment of Leasehold Rights
The debate regarding the applicability of GST on the transfer of long-term leasehold rights in India centers on whether it's a 'supply of service' or 'sale of land'.
Assignment of Leasehold Rights on Land under GST
Assignment of leasehold rights amounts to transfer of an immovable property. While the service tax law specifically excluded transfer of title in immovable property from the definition of service, the same cannot be stated regarding the GST law. The GST law only excludes sale of land and completed building from the scope of supply.
GST on Lease/Rental transactions
Lease agreements can be broadly classified into 2 categories: finance and operating leases. Learn about GST on lease/rental transactions in this blog.
GST update on taxability of assignment of leasehold
Now the latest update is regarding taxability of assignment of leasehold right in immovable property and admissibility of input tax credit thereon which was raised before the AAR in the case of M/s ENFIELD APPARELS LTD.
Assignment of Leasehold Rights on Land
The assignment of leasehold rights on land refers to the transfer of the leasehold interest or rights from one party to another. It involves the transfer of the rights and obligations associated with a lease agreement from the original lessee (assignor) to a new party (assignee). Leasehold rights on land typically arise when a lessee enters ...
Assignment of leasehold right on land is taxable under GST
In re Enfield Apparels Ltd (GST AAR West Bengal) The activity of assignment is in the nature of agreeing to transfer one's leasehold rights. It does not amount to further sub-leasing, as the applicant's rights as per the Deed of sub-lease stands extinguished after assignment. Nei.
WB AAR
Therefore, the assignment does not amount to transfer of any benefit other than leasehold rights in terms of the Deed for the unexpired period of the lease and is no transfer of any immovable property in the context of the GST Act. Thus, the activity of assignment of leasehold right is a service classifiable under 'Other miscellaneous service‟ (SAC 999792) and taxable @ 18% under Sl No. 35 ...
Whether assignment of leasehold right on land is taxable under the GST
The applicant, therefore, concludes that lease simpliciter alone should attract levy of GST. Assignment of leasehold rights on land, on the other hand, is nothing but the transfer of immovable property akin to the sale of land and buildings, and no GST is leviable on such assignments. "Sale" means the transfer of property or title for a price.
GST on Real Estate
GST on Real Estate - read how GST works in real estate including transfer of development rights, floor space index, and amount payable for long term lease.
PDF Goods & Service Tax, CBIC, Government of India :: Home
The activity of transfer of tenancy right against consideration in the form of tenancy premium is a supply of service liable to GST. It is a form of lease or renting of property and such activity is specifically declared to be a service in para 2 of Schedule II i.e. any lease, tenancy, easement, licence to occupy land is a supply of services 4.
Assignment of leasehold rights for the unexpired residual ...
The assignment, therefore, does not amount to transfer of any benefit other than leasehold rights in terms of the Deed for the unexpired period of the lease and is no transfer of any immovable property in the context of the GST Act. The activity of assignment is in the nature of agreeing to transfer one's leasehold rights.
GST Impact on Sale of Leasehold Land
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.
GST update on taxability of Assignment of leasehold right in immovable
The question before the AAR was whether GST is payable on the consideration received on assignment of leasehold right in property to another person and whether input tax credit can be claimed on transfer fees.
Constitutional Validity of GST on Lease/Rent Payments
The High Courts of Bombay and Delhi have upheld the constitutional validity of levy of GST on leasing transaction and on appeals by petitioners the SC has admitted appeals against such orders/ judgments. It is pertinent to note that various courts including SC have delivered judgements on the constitutional validity of levy of service tax on ...
PDF Recent Advance Rulings under GST and related issues -CTC
That the agreement made between the applicant and the lessee for long term of 99 years is for lease with many restrictions and has right to further sell/convey/transfer to the unit holder(s)/occupant(s) along with sub-lease/ assignment of undivided leasehold rights in the land for residue period of lease only
18% GST applicable on Assignment of Leasehold Right on Land ...
The West Bengal Authority of Advance Ruling (AAR) ruled that assignment of leasehold right on land is taxable at the rate of 18% under GST.
GST on Assignment of Leasehold Rights of SIDC Land
There is a contentious issue currently playing out in states with respect to the levy of GST on the transfer of leasehold rights of State Industrial Development Corporation (hereinafter referred to as the ' SIDC ') land by private parties. The SIDC assigns the leasehold right to private parties on a long-term lease basis, generally a 99-year ...
Is GST applicable for assignment of leasehold right in immovable
Is GST applicable for assignment of leasehold right in immovable property? Similar to the terms used in a property buying process, the world of renting is also filled with complex terms of its own. There are two main parties in a lease agreement. A lease is a contractual arrangement where one party, called the lessor, provides an asset for use by the other party, referred to as the lessee ...
GST on Lease/Rental Transactions
A lease is a contractual arrangement between owner (lessor) & user (lessee) whereby one party, the lessor, grants the right to use a particular assets (such as a parcel of land, building, equipment, or machinery etc.) for a specific period and under specified conditions to the other party, the lessee. ... GST on Lease/Rental Transactions ...
GST on Transfer of Leasehold Rights, Upfront Premium & ITC Eligibility
Clarification on GST for transferring leasehold rights, including upfront premium taxability and ITC eligibility, as ruled by AAR Uttar Pradesh.
Tax Implications on Assignment of Lease-Hold Rights
It has been a common practice for Governments and instrumentalities acting on behalf of Governments to allot parcels of lands on long-term leases. Such typically entail a one-time upfront premium (which fairly approximates the value of the land) and a periodic nominal rent (which also in many cases is compounded and collected upfront). The lease agreements executed between the lessor and the ...
Tax Insights: GST/HST issues relating to the assignment of ...
Can the assignee claim the GST/HST new housing rebate The assignment of an APS may also impact the assignee's eligibility to claim the new housing rebate, as evidenced by the Tax Court of Canada's recent decision in Chen Sun. The federal new housing rebate is equal to 36% of the federal component of GST/HST paid, up to a maximum of $6,300 (for homes valued at $350,000), with the rebate ...
Assignment of leasehold rights on land under GST
This allows them to have a long-term leasehold right over the land which may be for 99 years or even 999 years. However, they may not have sustenance in their operations on the entire portion of land for the full duration of the contract. Therefore, they have an option to assign those leasehold rights for the balance duration of the contract to ...
GoM Meeting Update: No Further Exemption In GST For Long Term Land
The GoM said, "The issues pertaining to grant of GST (Goods and Services Tax) exemption on the long term lease of land by private entity and sector specific exemption such as for tourism purposes ...
GST payable on transfer of leasehold rights
The transfer of leasehold rights was permitted with certain conditions by SIPCOT and it cannot be said that the transaction of such transfer is a supply of service by them attracting GST.; As for a supply to be taxed there must be an agreement to supply where the terms and conditions for such supply or for the receipt of such supply can be set ...
GoM meet in Goa: No further exemption in GST for long term land lease
The fourth meeting of the Group of Ministers on boosting the real estate sector held in Goa has decided no further exemption in GST should be granted on long term lease of land by private entity ...

GST update on taxability of assignment of leasehold right in immovable property

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What Is Assignment Of Leasehold Rights?

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Assignment of leasehold rights for the unexpired residual period is liable to GST

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Constitutional Validity of GST on Lease/Rent Payments – Supreme Court settles the Jurisprudence

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18% GST applicable on Assignment of Leasehold Right on Land: AAR [Read Order]

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GST payable on transfer of leasehold rights

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GoM meet in Goa: No further exemption in GST for long term land lease

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