Transfer of leasehold land: Authorities may have upper hand in GST levy

In the recent debate between realty companies and tax authorities around the demand for Goods and Services Tax (GST) on transfer of leasehold land, the latter may have a stronger case.

 

GST authorities may be able to defend their recent notices, demanding 18 per cent GST on the transfer of leasehold land, according to experts. Of late, these notices have been sent to several companies, including the Gujarat Industrial Development Corporation.

 

When a company sells its rights to leasehold land to a third party for the remaining lease term, the transaction typically attracts stamp duty.

 

Tax authorities, however, believe that this comes under the supply of services and an 18 per cent GST should apply to the sale value. The industry, on the other hand, says that this would mean double taxation and lead to a significant increase in the buyers' tax outgo.

 

In India, Schedule II of the CGST Act, 2017, deals with activities or transactions considered as supply of goods or services.

 

According to Vimal Nadar, senior director and head of research at Colliers India, "This can have a significant bearing on the buyer in terms of higher tax outgo in such sale transactions."

 

"This development could affect the cost of acquiring leasehold land for businesses and homebuyers," added G Hari Babu, national president of Naredco.

 

According to Nimit Davey, director, Grant Thornton Bharat, Schedule II of the CGST Act says that in the case of land and building, any lease, tenancy, or licence to occupy the property is to be considered a supply of services.

 

Moreover, any lease or letting out of a building — commercial, industrial or residential complex — for business or commerce, wholly or partly, is also a supply of services. For such services, the rate of GST has been fixed at 18 per cent.

 

In a 2018 case — Builders’ Association of Navi Mumbai vs Union of India — the Bombay High Court also ruled that a long-term lease of land cannot be treated as a sale of land but as a supply of service.

 

Gauri Jagtap, associate partner of law firm King Stubb & Kasiva, said that in the case of leasehold land, the transfer involves rights to use the property for a specified period without transferring ownership.

 

The authorities may argue that such transactions are more akin to the provision of a service than the sale of land.

 

The industry is of the view that there are no services provided in this sale and GST should not be imposed as it is covered under Entry 49 of List II of the Constitution of India's Seventh Schedule. This makes them liable to pay just duty on the benefits arising out of the land.

 

But Article 246A — added in the Constitution via the 101st amendment in 2016 — grants central and State governments the concurrent power to make GST laws. Moreover, it grants Parliament sole power to make laws on GST if the supply of goods or services takes place in the course of inter-State trade or commerce.

 

"In the context of GST, Article 246A provides the constitutional framework under which both the Union government and the State governments can levy and collect taxes on the supply of goods and services," Jagtap said.

 

Experts, however, believe that this issue needs debate and discussion.

 

“The constitutional validity of levy of tax on such leasehold transfer is rightly debatable as the same underlying transaction is being considered for stamp duty and GST,” said Davey.

 

“This has to be represented before the GST Council through industry and trade bodies for a clarification. Accordingly, a suitable amendment to the GST Act has to be brought in,” he added.

 

Last year, the Chamber of Small Industries Association, a pan-India MSME apex body, had urged the Centre to review the issue. Now, a petition has been filed in a Maharashtra court to clarify on the validity of the GST demand.

 

"The outcome of the ongoing legal review will clarify how such transactions will be taxed moving forward, potentially shaping future GST policies in the real estate sector," said Naredco's Babu.