Effects of Gujarat High Court decision on Goods and Services Tax responsibilities during leasehold rights transition
In a significant ruling, the Gujarat High Court has quashed the 18% Goods and Services Tax (GST) on the transfer of leasehold rights on industrial land. The court held that such transfers constitute a sale of immovable property, which is outside the scope of GST, rather than a supply of service.
The ruling, penned by Dhaval Vussonji, Managing Partner of Dhaval Vussonji & Associates, contrasts with the Telangana High Court’s ruling, which considered the transfer of leasehold rights as a supply of service liable to GST.
The Gujarat High Court's decision is based on several key factors. The leasehold rights in question pertain to long-term (99 years or more) leases of industrial land developed by Gujarat Industrial Development Corporation (GIDC). These lease rights involve the transfer of a substantial interest in land (industrial plots), effectively treated as immovable property, which the GST law (Schedule III of the CGST Act) exempts from GST.
The court emphasized that the transaction resembles a sale of land rather than a provision of services. The lease agreement allows transferability of leasehold rights with the approval of GIDC, but subject to conditions that ensure reversion to GIDC if terms are breached, reinforcing the nature of the transaction akin to land sale.
Several judicial precedents indicate that immovable property transactions, including leasehold rights and development rights, are outside the ambit of GST. The court also referred to the principle "Nemo Dat Quod Non Habet" during its ruling.
In contrast, the Telangana High Court reasoned that these transfers do not constitute an outright sale of land but a transfer of a right to use land, classifying it as a taxable service under GST.
This ruling on the Gujarat High Court’s decision on GST on leasehold rights could serve as a significant precedent for similar cases in other courts. The article expresses the opinions of Dhaval Vussonji, not necessarily reflecting the views of Bar & Bench, where it was published.
It's important to note that land and benefits arising out of land are considered as immovable property. Transfer of leasehold rights is distinct from renting of immovable property, which is treated as a supply of service.
For those interested in publishing Deals, Columns, or Press Releases on Bar & Bench, a form is available on their website. Radhika Shinde, a former Associate of the Firm, also contributed to the article.
[1] Gujarat High Court Judgment [2] Telangana High Court Judgment [3] CGST Act, 2017 [4] GIDC Lease Agreement [5] Principle of "Nemo Dat Quod Non Habet"
The Gujarat High Court's decision states that the transfer of leasehold rights on long-term leases of industrial land, although subject to approval by GIDC, resembles a sale of land more than a service, and thus falls outside the scope of Goods and Services Tax (GST) due to being exempted as immovable property under the CGST Act, 2017. On the contrary, the Telangana High Court considered this transfer as a supply of service liable to GST, due to it being a right to use land instead of an outright sale.
