GST on Long Term Land Lease

GST Applicability on Long-Term Lease/Reassignment of Industrial Plots

The question of whether Goods and Services Tax (GST) is applicable to the reassignment of an industrial plot, specifically when it involves a long-term lease, is a complex legal issue with significant implications. The core arguments against the applicability of GST revolve around the transaction being a sale of immovable property, which is exempted under GST law, and a specific exemption for long-term leases of industrial plots granted by government entities.

Long-Term Lease as a Sale of Immovable Property – Exempt from GST

One primary contention is that a long-term lease, especially one for an extended period, is legally akin to a sale of immovable property. Under the GST Act, the sale of land is explicitly exempted from GST under Schedule III.

• Definition of Land: Since 'land' is not defined within the GST Act, reliance is placed on definitions from other applicable laws. These define land as "the right, title or interest held by a landowner and/or benefits arising from a marked area with everything attached to it except trees, crops & grass".

• Lease in Perpetuity as Deemed Sale: As per settled legal principles, a long-term lease of land is considered a lease in perpetuity, which in turn is treated as a deemed sale of land. For instance, an assignment of benefits arising from a plot for 95 years is clearly a long-term lease, hence a lease in perpetuity.

• Support from Income Tax Law: This interpretation is bolstered by income tax regulations. CBDT Circular No. 35/2016 defines a long-term lease as a deemed sale of land under the Income Tax Act, thereby exempting Tax Deducted at Source (TDS) on the lease premium paid.

• Judicial Precedent on Ownership: The Hon’ble Supreme Court, in the case of CIT vs. Poddar Cements Ltd. [1997 (5) TMI 2-Supreme Court], determined that a long-term lessee of land is to be considered its owner, and income arising from such a lease is taxed as income from property. This further reinforces the idea that long-term leases confer ownership-like rights.

• Service Tax Precedents – Transfer of Leasehold Rights: Prior to GST, similar issues arose regarding Service Tax. The CESTAT, in the case of Luxmi Township Ltd. [2023 (79) GSTL 232 (Tri.-Kolkata)], observed that such a transaction "must be treated as 'sale of leasehold rights' and service tax would not be applicable on the outright transfer of rights for a period of 99 years". This stance was also supported by a previous Tribunal decision in Greater Noida Industrial Development authority vs Commissioner of Central Excise and Service Tax, Noida. The Tribunal in Gujarat Power Corporation Ltd. Vs C.C.E. & S.T. (CESTAT Ahmedabad) further held that a one-time premium is not chargeable to Service Tax under the renting of immovable property service.

• Distinction Between Premium and Rent: A crucial distinction is drawn between a 'premium' and 'rent'. The Tribunal clarified that a premium is the price paid for obtaining the lease of an immovable property, while rent is the payment made for the use and occupation of the leased property. Therefore, charging service tax on a one-time premium was deemed incorrect.

• Limitation Act Implications: The Indian Limitation Act, which governs the recovery of possession of immovable property, states that even a government entity cannot sue another person for recovery of possession over immovable property after a lapse of 30 years. Given that the leases in question are for 95 years and over 52 years, both exceeding 30 years, this reinforces the argument that these are permanent transfers. The CESTAT Mumbai, in CIDCO vs Commr Service Tax -VII Mumbai, held that leasing land for above 30 years amounts to a permanent transfer because no suit is maintainable for recovery of possession by the owner/lessor after 30 years, in view of Sections 65 & 67 of the Transfer of Property Act. Consequently, lease premium collected on long-term leasing of immovable property is not a service that can be equated with renting of immovable property.

Specific GST Exemption for Long-Term Leases of Industrial Plots

Even if GST were to be considered applicable in some contexts, there is a specific exemption that would apply to the reassignment of industrial plots under certain conditions.

• CBIC Clarification: Circular No. 101/20/2019-GST dated 30.4.2019 from the CBIC clarifies that an exemption from GST is admissible on the upfront amount (variously called premium, salami, cost, price, development charges, etc.). This exemption applies to services 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.

• Applicability Conditions: This exemption is specifically for leases provided by State Government Industrial Development Corporations or Undertakings, or by any other entity with 50 per cent or more ownership of Central Government, State Government, or Union territory, to industrial units or developers in any industrial or financial business area. A key condition supporting this exemption in the current context is that there is no change of use and the land continues to remain for industrial use. The fact that the entire lease premium was paid upfront before the transfer also ensures the benefit under Serial No. 41 of Notification 12/2017 is applicable.

• Support from Advance Rulings: This specific exemption has been consistently supported by various rulings from the Authority for Advance Ruling (AAR) and Appellate Authority for Advance Ruling (AAAR) across India:

  • The West Bengal Appellate Authority for Advance Ruling (AAAR), in the case of CGL Hotel and Resort Company Ltd., held that the premium paid is exempted under Sl. No. 41 (SAC 9972) of Notification No. 12/2017-CT(Rate), as amended.

  • The Jharkhand Authority for Advance Ruling (AAR), in Ranchi Smart City Corporation Ltd., held that the leasing of property by RSCCL is exempted from tax if covered under the provisions of Notification No. 12/2017-Central Tax (R).

  • The Uttar Pradesh Authority for Advance Ruling (AAR), in the case of Yamuna Expressway Industrial Development Authority, also held that GST is not applicable (i.e., exempted) on the upfront amount if the conditions mentioned at Sl. No. 41 of Notification 12/2017-Central Tax (Rate) are satisfied.

  • The Maharashtra Authority for Advance Ruling (AAR), in the case of CIDCO transferring leased land to NMMC and PMC, held that GST is not applicable on lease premiums paid.

  • While the Jharkhand AAR in Tangerine Skies Pvt Ltd held that instalment payments do not come under the category of upfront payment and are therefore not exempt, it implicitly supports the exemption for upfront payments. The current case involves the entire lease premium being paid upfront, making the benefit applicable.

• Taxable Value Dispute: Furthermore, if GST is ultimately determined to be payable, it should be levied on the actual premium paid to MIDC (Rs. 22,70,500/-), not on an all-inclusive consideration (Rs. 5.48 crores).

• Pending Cases: Similar matters (e.g., Special Civil Application No.11345/2023, 10186/2024) are currently pending before the Hon’ble Gujarat High Court, which by its order dated 12.07.2024, has held that no further proceedings shall be continued pursuant to show cause notices in these cases.

In light of these comprehensive legal arguments, precedents, and specific exemptions, the demand for GST on such long-term lease or reassignment transactions on industrial plots is considered to be without legal basis.