Assignment of Leasehold Rights on Land under GST
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- Last Updated on 27 May, 2022
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Shubham Khaitan – [2022] 138 taxmann.com 453 (Article)
Introduction
Various entities have their units set up on the leasehold land provided by the State Industrial Development Corporation. For getting such rights over the land, these entities have to pay an upfront premium. This allows them to have a long-term leasehold right over the land which may be for 99 years or even 999 years. However, they may not have sustenance in their operations on the entire portion of land for the full duration of the contract. Therefore, they have an option to assign those leasehold rights for the balance duration of the contract to another entity which is endeavouring to setup their industrial unit. The taxability of such leasehold rights under GST has been a conundrum among various stakeholders. This article purports to examine the relevant aspects of its taxability in depth.
Coverage within the definition of supply under Section 7(1)
The aforesaid definition of supply is an inclusive one. Section 7(1)(a) covers all forms of supply for a consideration and in the course or furtherance of business. It provides for illustrative forms of supply like sale, barter, rental, lease etc.
Even though assignment of rights is not specifically mentioned, the same can be covered within the definition of supply.
In the given situation, there is a consideration involved in the form of transfer fees against the assignment of leasehold rights.
Further, the definition of business in the GST law is wide enough to cover the given transaction.
Therefore, the aforesaid definition of supply under Section 7(1) provided above covers within its ambit the assignment of leasehold rights.
Exclusion from the ambit of supply
Section 7(2)(a) of the CGST Act 2017 provides that certain activities or transactions provided in Schedule III would be treated neither as supply of goods nor as supply of services i.e. not a supply altogether.
Entry no. 5 of Schedule III of the CGST Act 2017 provides for sale of land. Therefore, sale of land would be treated neither as supply of goods nor as supply of services.
Undoubtedly, sale of freehold land and completed building is not a supply as per Schedule III of the CGST Act 2017. Whether the same also holds true for assignment of long term leasehold rights over the land and transfer of completed building over it needs to be carefully examined.
Leasehold rights as benefit arising out of land
To analyze and understand as to whether transfer of leasehold rights can be construed as sale of land, one should refer to the allied laws which discusses about the definition of immovable property.
As per the Registration Act 1880:“immovable Property” includes land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth, or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops nor grass
As per the General Clauses Act 1897:“Immovable property’ shall include land, benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth”.
There is no doubt that leasehold rights is a benefit conferred upon a person to enjoy the occupancy and possession over the land for the lease period. Therefore, leasehold rights amount to a benefit arising of land. Since benefit arising of land is considered as an immovable property, leasehold rights can also be classifiable as immovable property. Assignment of leasehold rights amounts to transfer of an immovable property
While the service tax law specifically excluded transfer of title in immovable property from the definition of service, the same cannot be stated regarding the GST law. The GST law only excludes sale of land and completed building from the scope of supply.
Whether such benefit arising out of land can be treated as equivalent to sale of land needs to be now reviewed.
As per Section 3(a) of Land Acquisition Act, 1894:The expression ‘land’ includes benefits that arise out of land and things attached to earth or permanently fastened to anything attached to the earth”
As per Section 3(4) of Bombay Land Revenue Code, 1879:‘land’ includes benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth and also shares in or charges on the revenue or rent of village or other defined portions of territory”
The above definitions clearly provide that land would include benefits arising of land. On the other hand, the definitions of immovable property above treated land separately from benefit arising out of land.
If the leasehold rights are treated as land itself, no tax would be applicable on its assignment. On the other hand, if the said leasehold rights being benefit arising of land is treated separate from land, then the same would be treated as a supply under the GST law.
Long term lease equivalent to sale?
Whether long term lease can be treated to be equivalent to sale of land has been question which the courts have examined long before GST was envisaged. The answer to this question may not be available from the GST law directly. Therefore, this question is being analysed from judgements under the erstwhile regime apart from GST also.
Favourable Judgements
Incidentally, we may also point out that as early as 1928 in the decision in the case of Archaka Sundara Raju Dikshatulu v. Archaka Seshadri Dikshatulureported in (1928) 54 MLJ 76, the Court held that the lease for 99 years or for a long term in consideration of a premium paid down is as much an alienation as a sale or mortgage. This Court pointed out that the mere use of the word ‘lease’ or the fact that a long term is fixed would not by itself make the document in lease. In this connection, this Court followed the decision in the case of Rama Varma Tambaran v. Raman Nayar reported in (1882) ILR 5 M 89, holding that there was no real distinction between mischief of such a transfer in perpetuity and a transfer for the long period of 96 years. Thus, this Court took a view that a permanent lease is as much an alienation as a sale. In the background of what we have narrated about and the clauses in the assignment deed, we hold that the lumpsum amount paid does not make a permanent lease any the less an alienation than a sale.
In the case of RIICO Ltd. v. Commissioner of C. Ex. [2017] 82 taxmann.com 304 / [2018] 10 GSTL 92 (New Delhi – CESTAT), the following was held:
“Admittedly, substantial part of the demand against the appellant in various proceedings, relate to their Service Tax liability on lump-sum premium amount, received by them from the allottees on allotment of land on long term basis. In view of the introduction of new Section 104 in the Finance Act, 1994 the appellant’s liability on such consideration no longer exists. The one-time payment received for grant of long term lease of 30 years or more of industrial plot, is not liable to Service Tax for all the periods covered in the present proceedings. However, we hold that the appellants are liable to pay Service Tax in respect of such one-time amounts received in respect of lease granted for less than 30 years.The appellants are liable to Service Tax on the activity of leasing of land, for use in the furtherance of commerce or business, from 1-7-2010. However, considerations received as lump-sum upfront payment in respect of lease of land for a period of 30 years and above shall not be liable to such tax;”
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There is lots of confusion on this issue , you have made an attempt by discussing the basis as to the definition of assets ..good