The Gujarat High Court has held that goods and services tax would not apply to the transfer of leasehold rights to third parties on land allocated by the Gujarat Industrial Development Corp., a significant relief to industries dealing with such transfers.
"This is a major and noteworthy development concerning GST on the assignment of government land," Abhishek Jain, indirect tax head at KPMG, said.
The exemption removes a significant financial burden on businesses involved in leasing industrial plots, making it more cost-effective to invest in industrial estates, according to Abhishek Rastogi, founder at Rastogi Chambers.
Rastogi added that micro, small and medium enterprises, and startups would benefit greatly from this ruling as these entities frequently acquire leasehold land in industrial estates to set up operations and often transfer leasehold rights when expanding or restructuring. The exemption ensures that such critical transactions remain affordable.
The issue arose when the government, after the enactment of the GST Act in 2017, issued show-cause notices to a number of lessees who had transferred their leasehold rights to third parties, seeking GST at the rate of 18% for the transfer of such rights. It contended that such transfers come under the head of 'supply of services' and, therefore, a tax rate of 18% must be payable on every transfer of leasehold rights to third parties.
The lessees argued that the assignment of leasehold rights is tantamount to the transfer or sale of immovable property and therefore, cannot be said to be a 'supply of service' under the Act. The GST Act clearly provides that the sale of immovable property cannot be treated as supply of goods or services and no GST is applicable on the same.
In an order dated Jan. 3, the high court agreed with the stand taken by the lessees.
The court said that when the GIDC allots a plot of land on lease for a long period of time, the same can be classified as a 'supply of service' as the ownership of the land does not change hands and the GIDC charges a one-time premium coupled with periodical rent from the lessee.
However, when the lessee transfers this lease to a third party, that transaction is equivalent to the transfer or sale of immovable property as on the transfer of the leasehold rights, the original lessee gives away all its rights in the property to the third party, the court said.
Experts believe that though this ruling comes as a relief for the industry, the revenue authorities might challenge the verdict before the top court. Until then however, businesses can continue to benefit from the decision.
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