GST on Leasehold Rights Transfer – An End to the Conundrum?
The taxability of assignment/transfer of leasehold rights has been a largely debated topic under the GST law. Generally, companies set up their units on land provided by the State Government Industrial Development Corporation under longterm lease arrangements (30 years and above). However, there could be situations where such companies do not want to continue their operations and accordingly, transfer their rights in land and building to a third party for the remaining lease life, subject to the Corporation’s approval.
The GST Department is of the view that such transfer qualifies as supply service in terms of Section 7(1) of CGST Act r/w Schedule II1 to the CGST Act and therefore liable to GST at 18%. On the other hand, the industry has been contesting these demands on the ground that the same is akin to the sale of land and buildings and thereby excluded from the scope of GST in terms of Schedule III2. At this juncture, it may be pertinent to note that a one-time upfront amount (called premium, salami, cost, price, development charges, or by any other name) leviable in respect of the service, by way of granting long-term (30 years, or more) lease of industrial plots, provided by the State Government Industrial Development Corporations or Undertakings to industrial units, is exempt from GST vide Notification No. 12/2017-CT (Rate).
There have been multiple advance rulings on this subject matter such as in the case of Enfield Apparels Ltd [2020 (40) G.S.T.L. 230 (A.A.R. - GST - W.B.)], Greentech Mega Food Park (P.) Ltd. [2019 (27) G.S.T.L. 143 (A.A.R. - GST)], and Remarkable Industries Pvt. Ltd. [2024 (84) G. S. T. L. 389 (A. A. R. - GST - U. P.)] wherein it has been held that the activity of assignment is in the nature of agreeing to transfer one’s leasehold rights, which is classifiable under SAC 999792 and taxable at 18% under Sr. No. 35 of Notification No. 11/2017- CT (Rate) r/w Entry No. 5(e)3 of Schedule II.
However, recently, the Gujarat High Court in the case of Gujarat Chambers of Commerce & Industry vs. Union of India [2025 (1) TMI 516 - Gujarat High Court] ruled that the assignment of leasehold rights in land allotted by the Gujarat Industrial Development Corporation (GIDC) constitutes a transfer of immovable property and is not liable to GST.
The petitioners therein had challenged the notices and summons issued by the GST authorities arguing that transfer/ assignment of the leasehold rights is nothing but a sale and transfer of benefits arising out of immovable property i.e. plot of land, which cannot be considered a as supply of services because sale, transfer, and exchange of benefit arising out of immovable property is nothing but sale, transfer and exchange of the immovable property itself and, therefore, such transactions would not be subject to levy of tax under the provisions of GST Act. The petitioners also pointed out that the imposition of GST on such an assignment would lead to double taxation since the said transaction is also subjected to stamp duty.
On the other hand, the Revenue sought to distinguish “immovable property” and “interest in immovable property” i.e. difference between tangible rights and intangible rights in the immovable property to submit that immovable property as such is not liable to levy of GST whereas interest in immovable property like leasehold rights which is transferred by way of sale is liable to levy of GST falling within the scope of “supply of services”.
Upon going through the definition of “immovable property” under various legislations such as the General Clauses Act, the Transfer of Property Act and the Registration Act, the Gujarat High Court noted that what the petitioners have transferred by way of assignment/sale is leasehold rights which is over and above the actual physical plot of land and building, encompassing the incorporeal ownership right in such land and building such as the right to possess, to enjoy the income from, to alienate, or to recover ownership of such right from one who has improperly obtained the title. Therefore, immovable property includes, in addition to the right of ownership, the aggregate of rights that are guaranteed and protected by the further agreement or contract between the owner and the lessee.
Finding the Revenue’s argument to be untenable, the High Court observed that in the case of a lease, the right of ownership of the plot remains with the GIDC and such land along with all other rights thereto (such as the right to occupy, to construct, to possess) will revert on expiry of the lease period. On the other hand, upon sale/transfer of leasehold rights, the lessee-assignor divests all the absolute rights in the property to the assignee. Therefore, interest in immovable property in the form of leasehold rights cannot be said to be different from the immovable property itself.
It was further observed that under the Service Tax law, even the development rights which are the benefits arising from land, were not liable to tax. Leasehold rights are in fact a greater right and interest in the land than development rights and therefore, the principle under the Service tax regime would continue to apply even under the GST regime.
In view of the above, the High Court held that when the lessee-assignor transfers the land having leasehold rights and building to the assignee, the same cannot be considered as supply of service as it would be a transfer of immovable property covered by Entry No. 5 of Schedule III. Resultantly, it rejected Revenue’s reliance on the advance ruling in the case of Remarkable Industries Pvt. Ltd. (supra) by holding that the consideration received by the lessee-assignee is not in nature of premium but is a consideration for the outright sale of leasehold rights which cannot be equated with subleasing in any manner.
Consequently, the High Court concluded that assignment by sale and transfer of leasehold rights of the plot of land allotted by GIDC to the lessee in favour of third party-assignee for a consideration shall be assignment/sale/transfer of benefits arising out of “immovable property” and therefore, not liable to GST.
In a similar matter, the Bombay High Court in the case of Panacea Biotec Limited vs. Union of India & Ors. [TS-22- HC(BOM)-2025-GST] quashed the demand order and directed the Revenue to take into consideration the aforesaid decision of the Gujarat High Court while adjudicating the issue afresh.
Our Comments
The above verdict provides clarity on the taxability of leasehold rights, which in turn should reduce the tax burden on businesses undertaking such transactions. While media reports suggest that the Government is contemplating challenging this decision before the Apex Court, the taxpayers could rely on the said judgement while responding to the demand notices received so far. Further, those who have already paid taxes on such assignment deeds may explore the possibility of seeking refunds, subject to the time limit and by passing the test of unjust enrichment.
Moreover, it would be interesting to see if the aforesaid principle can be applied to the transfer of other rights in immovable property such as development rights and tenancy rights. Here, it is pertinent to note that the CBIC vide Circular No. 44/18/2018-GST dated 2 May 2018 has clarified that the activity of transfer of tenancy rights to a new tenant against consideration in the form of tenancy premium is a supply of service liable to GST. Hence, in the coming times, we could see a lot more litigation on these aspects and one has to wait for the Apex Court’s decision for the issue to attain finality.
1. As per Entry No. 2 of Schedule II, “Land and Building - (a) any lease, tenancy, easement, licence to occupy land is a supply of services; (b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.”
2. Entry No. 5 of Schedule III reads as follows - “sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”
3. As per Entry No. 5(e) of Schedule II, “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” shall be treated as supply of service.