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  1. GST on land lease: High Court ruling upsets status quo

GST on land lease: High Court ruling upsets status quo

The Bombay High Court has ruled that the one-time premium payable for long-term lease (30 years or more) of land would attract goods and services tax (GST) as it constituted ‘supply’ under the GST Act. Experts said that the order went against the accepted principle of considering long-term leases as “sale of immovable property”, which is outside the purview of GST.

By: | New Delhi | Updated: July 17, 2018 6:35 AM
Short-term lease (less than 30 years) are anyway subject to GST and had attracted service tax in the previous regime. (Reuters)

The Bombay High Court has ruled that the one-time premium payable for long-term lease (30 years or more) of land would attract goods and services tax (GST) as it constituted ‘supply’ under the GST Act. Experts said that the order went against the accepted principle of considering long-term leases as “sale of immovable property”, which is outside the purview of GST.

Short-term lease (less than 30 years) are anyway subject to GST and had attracted service tax in the previous regime.

In the present case, the petitioners, who are builders and developers, won bids for leasing land from City Industrial and Development Corporation of Maharashtra (CIDCO) in Navi Mumbai and Panvel. But they questioned the GST levy on the one-time lease premium (along with monthly rentals that are taxable) when the allotment letter was issued. The revenue department contended that the grant of leases constituted ‘supply’ for a ‘consideration’ and was, hence, eligible for GST.

“Envisaging GST on one-time lease premium paid for acquisition of leasehold land may trigger yet another controversy questioning the applicability of GST on all transactions of leasehold land deals in the corporate arena,” said Rajat Mohan, partner, AMRG & Associates.

“This ruling challenges the tradition of treating a long-term lease of an immovable property as akin to sale of immovable property for the purposes of charging indirect taxes,” Mohan added.

Sale of land doesn’t attract GST even as states impose stamp duty and registration fees on such transactions. However, GST is payable on renting of immovable property or construction of a complex/building/civil structure. Put simply, sale of land will not attract GST and sale of building after obtaining completion certificate or after its first occupation will not attract GST.

However, sale of building before its first occupation or before issuance of completion certificate will be taxed under GST, and be treated as supply of service.

The tax department issued a notification in 2016 exempting upfront amount (premium, ‘salami’, development charges, etc) received by state governments’ industrial development corporations for providing taxable services by way of granting long-term lease of industrial plots to industrial units.

“At this stage it is necessary to start discussions on inclusion of the real estate sector including transactions involving land within the GST ambit, so that issues in relation to leasing/renting of land are dealt with appropriately within the GST framework,” said MS Mani, partner, Deloitte India.

According to the GST Act, sale of land doesn’t attract GST even as states impose stamp duty and registration fees on such transactions. However, GST is payable on renting of immovable property, construction of a complex, building, civil structure.

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