Gujarat High Court rules that no GST is applicable on the transfer of leasehold rights in land, quashing show cause notices issued by tax authorities.

The Gujarat High Court recently deliberated on a contentious issue involving the levy of Goods and Services Tax (GST) on the assignment of leasehold rights in industrial plots. This judgment, delivered in a group of Special Civil Applications led by the Gujarat Chamber of Commerce and Industry, highlights critical aspects of taxation under the GST regime and its implications for industrial entities.

Background

The Gujarat Industrial Development Corporation (GIDC) develops industrial estates and leases plots for 99 years to industrial entities. These leases allow the lessee to transfer leasehold rights to third parties, subject to GIDC's approval. The dispute arose after the GST Act's introduction, where authorities began levying an 18% GST on transactions involving the assignment of leasehold rights. Several petitioners challenged this, arguing that these transactions should not attract GST as they involve immovable property.

Petitioners' Arguments

1. Nature of the Assignment: Petitioners contended that the assignment of leasehold rights represents the transfer of an interest in immovable property and does not constitute a "supply of service" under GST provisions.

2. Legal Framework:

   • Under Section 105 of the Transfer of Property Act, a lease represents a transfer of rights in immovable property.
   • Previous judicial interpretations equate leasehold rights with immovable property, thus falling outside GST's scope.

3. Tax Exemptions: The petitioners also referred to exemptions under Notification No. 12/2017, which exempts one-time premiums for long-term leases of industrial plots granted by state industrial corporations.

Respondents' Position

The government argued that such assignments qualify as a supply of service under Section 7(1) of the GST Act. They relied on specific tariff entries and directives to justify the GST levy.

Key Issues

The court analyzed whether:

• The assignment of leasehold rights qualifies as a taxable supply under GST.
• The exemptions provided under the GST notifications are applicable to such transactions.
• There exists a distinction between a transfer of ownership and service provision under the GST framework.

Court’s Observations

1. Nature of Transactions: The court noted that assignments of leasehold rights extinguish the assignor's interest and confer absolute rights to the assignee. Thus, they bear similarities to property transfers rather than service provision.

2. Scope of Supply: While the GST Act defines services broadly, the court emphasized the necessity of distinguishing services from property transfers. Including immovable property transactions within "services" stretches the term beyond its reasonable interpretation.

3. Input Tax Credit (ITC): Petitioners argued for ITC benefits if GST is levied, ensuring no cascading tax effects.

Implications

This case underscores the challenges in applying GST to real estate and property-related transactions. The judgment will likely impact:

• Industrial entities engaging in leasehold rights assignments.
• Taxation policies regarding immovable property transactions under the GST framework.

Conclusion

The court's decision clarified that the assignment of leasehold rights should not automatically be treated as a "supply of service" under GST. The court emphasized that such transactions involve the transfer of rights in immovable property, which aligns more with property transfers than services. It also pointed out that the government cannot broadly interpret GST provisions to include immovable property transfers as taxable services.

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