GST can’t be levied on leasehold rights of GIDC plots transferred to third party, says Gujarat HC

The HC was hearing a group of petitions over levying GST on the leasehold rights of a third party on plots — allotted on lease by the GIDC — on which buildings may have been constructed by the lessee or its successor (assignor) on payment of lump-sum consideration — considering the same as supply of service under the Central/State Goods and Service Tax Act, 2017 provisions.

The court had preferred a special civil application by the Gujarat Chamber of Commerce and Industry (GCCI) as a lead matter in the case.

The GIDC, established under the Gujarat Industrial Development Act, 1962, is a nodal agency of the state government which acquires land to develop them as industrial estates by creating infrastructure such as roads, water supply, drainage, street lights and so on. The GIDC allots land to an industrial entity or person on a long-term lease for 99 years.

The matter pertained to multiple companies and entities facing the notices seeking 18% GST to be paid on lease transfers of lands owned by the GIDC.

Chairman of the Indirect Tax Task Force at GCCI, Advocate Nayan Sheth, told The Indian Express, “The GIDC gives a long term lease of 99 years to a particular industry. Under the GST, there is a notification that when GIDC gives a long-term lease, no GST will be applicable. The original deed grants power to the lessee to transfer leasehold rights after taking GIDC’s approval. In such cases, the original lessees pay the stamp duty on it and thereafter, the new lessee becomes the direct lessee of the GIDC and the original lessee gets out of the picture. The contention of the GST was that this is a supply of service. However, the arguments before the court from the petitioners was that it was a transfer of immovable property”.

The court observed that while the petitioners submitted that the transactions of assignment of leasehold rights cannot be viewed in scope of “supply of services” by the GST, the respondents, represented by Advocate General Kamal Trivedi, drawing a distinction between “immovable property” and “interest in immovable property” said that interest in immovable property would be liable for GST within the scope of “supply of services”.

The HC in its order, said, “As the assignor (original lessee of the GIDC) transfers leasehold rights after receiving the consideration as determined on the basis of value of such leasehold rights, such transaction therefore would of an “immovable property” and cannot be considered as “supply

of services” as held by Hon’ble Apex Court (in other cited judgments)… the contention of the respondents (authorities) that… transfer of leasehold rights as the interest in immovable property being intangible would be covered by the scope of supply of service, is not tenable … and cannot be said to be ‘service’ as contemplated under the provisions of GST Act. Moreover, assignment/transfer of rights would be out of

scope of supply of service”.

Meanwhile, Sheth added that one of the important arguments considered by the court was that the levying of GST on transfer of leasehold rights had a cascading tax effect.

Sheth said, “The government has not abolished stamp duty on transfer of property even after the introduction of GST and stamp duty continues to be levied on immovable property. Treating this leasehold agreement with the GIDC as an immovable property transfer, stamp duty is levied… the court considered that the proposed imposition of GST on leasehold rights leads to double taxation, leading to cascading effect, which is specifically sought to be avoided by introduction of the GST regime and is arbitrary”.

The HC also declined the application of the state government to stay the operational order to allow time to appeal in the Supreme Court. Sheth added, “We are expecting the government to move the SC against this order but at least we are moving in a direction to reach a conclusion”.