Impact of Gujarat High Court’s ruling on GST liability on transfer of leasehold rights

In a breather to the industrial realty leasing sector, the Gujarat High Court has passed a landmark judgement in the case of Gujarat Chamber of Commerce and Industry & Ors. Vs. Union of India quashing 18% GST on the transfer of leasehold rights on industrial land.

Earlier, the Telangana High Court in the case of M/s. Prahitha Construction Private Limited Vs. Union of India held that transfer of leasehold rights cannot be regarded as sale of land and comes under the ambit of supply of service - thus, making the transaction liable to GST. Gujarat High Court has taken an entirely contrary view from the judgement pronounced by Telangana High Court upholding that such transfers constitute sale of land - thus, exempting them from GST. Let’s understand the reasoning behind this decision pronounced by the Gujarat High Court.

Gujarat Industrial Development Corporation (GIDC) is responsible for the development of industrial areas in Gujarat. GIDC acquires and develops land with necessary basic infrastructure which is then allotted to the potential allotees by executing a licensing agreement. These registered lease deeds are for a period of 99 years or more. The potential allotees have the right to transfer the leasehold rights with the approval of GIDC with a condition that on failure to comply with the terms of the agreement there will be reversion, and the ownership of the land will vest in GIDC. The important question that arose here is whether this transfer of leasehold rights from potential allotee to the lessee will constitute as supply of service.

The Gujarat High Court held that the transfer of leasehold land for a period of 99 years is equivalent to sale of land as it is already subject to State-imposed stamp duty. It opined that a levy of GST would result in double taxation of the transaction. Sale of land is specifically covered under Schedule III of the CGST Act, 2017, which lists activities or transactions which shall be treated neither as supply of goods nor services. Land is categorized as immovable property and though the term immovable property is not defined specifically in the CGST Act, 2017, in other enactments, it means to include benefits arising out of land too. Transfer of leasehold rights is distinct from renting of immovable property, which is treated as supply of service, as the latter involves complete transfer of ownership rights and responsibilities.

The Court further referred to the Supreme Court’s principle – “Nemo Dat Quod Non Habet” which means no one can transfer a better title than what he himself has. In the given transaction of lease, there is always a possibility of reversion. Ownership vests in the owner during the entire term of the lease. The lessee never becomes the owner. Transfer of leasehold rights by the lessor in the favor of lessee divests the lessor of all absolute rights with the right of possession and usage. A freehold conversion is the sole discretion of the lessor. So leasehold rights are required to be considered as rights associated with immovable property, distinct from the ownership rights. Even during the regime of Service Tax Law, development rights, which are benefits arising from land, were not taxed. In leasehold rights, what is assigned by the lessor to the lessee is not only the land allotted by GIDC on lease, but the entire land along with building which was constructed on such land. The same is a capital asset in the form of an immovable property. Thus, leasehold rights comprise greater rights and interest in land than development rights and so, shall be exempt.

This ruling will act as a strong precedent for similar cases pending before other courts and provide relief to major developers and industries in the leasing sector.

About the authors: Dhaval Vussonji is the Managing Partner of Dhaval Vussonji & Associates. Radhika Shinde is a former Associate of the Firm.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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