Levy of GST on Assignment of Leasehold Rights: Aftermath of Gujarat High Court’s verdict

One of the burning questions upon the introduction of goods and services tax (GST) was whether GST is leviable on benefits arising from land, viz. development rights, leasehold rights, easements, profit a prendre, etc. This question arose specifically on account of the wide definition of the term “service” as “anything other than goods”¹ and the exclusion of only “sale of land and building” from the scope of the taxable event of “supply”.² GST law’s definition of “service” and “supply” was a stark departure from the earlier service tax regime wherein the definition of “service” inter alia did not include “an activity which constitutes merely as a transfer of title in goods or immovable property, by way of sale, gift or in any other manner”.³

In the service tax regime, it was an acceptable position to not levy service tax on transfer of benefits arising from land since such benefits are regarded as “immovable property”.⁴ Recently, the Gujarat High Court (HC) in Gujarat Chamber of Commerce & Industry v. Union of India⁵, has held that GST is not leviable on assignment of leasehold rights while deciding a batch a writ petitions challenging notices/summons on the said issue. In this article, the authors would critically analyse the findings of the Court and discuss the aftermath of the judgment for taxpayers.

Findings of the Gujarat High Court

Background

The issue before the Court was whether GST was leviable on assignment of leasehold rights pertaining to a Gujarat Industrial Development Corporation (GIDC) plot by a lessor (other than GIDC) to a lessee in consideration of lump sum charges. The ownership rights over the plot always remained with GIDC and the original allotment of lease by GIDC to a lessee is treated as a service but exempt from GST.⁶ The assignment entails divesting of all rights of the lessor in favour of the lessee. The lessor does not retain any right of reversion.

Findings and reasoning

The Gujarat High Court has inter alia held that GST is not leviable on the assignment of leasehold rights for the following two-pronged reasoning—

Assignment of leasehold rights does not qualify as a “service” under GST:

(i) When leasehold right is transferred by the lessee-assignor in favour of a third person-assignee, it would be nothing but transfer of an “immovable property” in view of the settled legal position that lease for 99 years or for a long-term in consideration of premium paid is as much an alienation as sale or mortgage. (para 63)

(ii) Placing reliance on various judgments, it was held that sale and service are not interchangeable. The scope of “supply of services” would not include transfer of leasehold rights as it would be transfer of immovable property being a benefit arising out of immovable property consisting of land and building. (paras 70-73)

Assignment of leasehold rights is not a supply on account of being covered by Para 5 of Schedule 3:

(i) The entire land and building transferred along with leasehold rights constitutes a “profit a prendre” which is also an immovable property and therefore, would not be subject to tax under GST. (para 78)

(ii) Service tax was not leviable on transfer of immovable property. The object of GST is to subsume the existing taxes. Thus, the said principle under service tax is to continue in the GST regime. Same is evident from the decision of the 7th GST Council Meeting wherein the proposal to levy GST on land and building was rejected and Para 5 was inserted to Schedule 3 to the Central Goods and Services Tax (CGST) Act, 2017 excluding sale of land and building from the scope of supply. The said proposal was suggested in the 5th GST Council Meeting by specifically noting that service tax was not leviable on transfer of immovable but there was no constitutional embargo for imposing such tax under GST regime. This fortifies the intention of the GST Council not to impose tax on transfer of immovable property continuing the underlying object of erstwhile service tax regime. (paras 75-76)

(iii) The Court distinguished between GST implications on grant of leasehold rights and the GST implications on assignment of leasehold rights. Assignment would be covered by Para 5 of Schedule 3 whereas grant of leasehold rights by GIDC would be covered by Para 5 of Schedule 2 (albeit exempt from GST). A sub-lease or lease transaction wherein the reversionary rights are retained would be covered by Para 5 of Schedule 2. However, an outright assignment entailing a complete divestment of rights would be covered by Para 5 of Schedule 3. [para 82(12)]

The judgment has distinguished few judgments relied on by the respondents and has also relied upon few other ancillary reasons to justify the finding that GST is not leviable on leasehold rights. The same is not examined in this article.

Aftermath for taxpayers

Scope of “services” under GST open for interpretation

The Gujarat HC’s judgment has opened up the pandora box of possible litigation on the scope of transactions which do not qualify either as goods or services under GST. It is possible for taxpayers to contend that the taxable event does not stand triggered once the transaction does not qualify as “goods” and “services”. The Gujarat High Court has recognised that anything other than “goods” do not automatically qualify as “services” by referring to judgments holding that sale and service are not interchangeable.⁷

The possibility of a transaction or activity not qualifying as a supply of goods or as a supply of services has been duly recognised by the drafters themselves. For this reason, Schedule 2 has been incorporated in the CGST Act to clarify the nature of the supply (i.e. goods or services) for a few transactions. Additionally, in respect of select transactions, as a matter of abundant caution both the goods tariff and the service tariff have specific rate entries. For example, permanent transfer of intellectual property rights⁸ and electricity⁹. This Gujarat HC judgment will shape the jurisprudence on scope of “services” under GST in future cases.

Para 5 of Schedule 3 — Scope expanded by judicial interpretation

The GST applicability on different kinds of assignments (viz. assignment of development rights, easements, profit a prendre e.g. right to take produce from a land, etc.) pertaining to immovable property merits a revisit in light of the Gujarat HC judgment. It requires to be seen whether GST is applicable when such assignments are absolute in nature without any reserved rights of reversion.

It is important to note that the Gujarat HC’s reasoning on why assignment of leasehold rights is covered by Para 5 of Schedule 3 to the CGST Act, 2017 placed a lot of emphasis on insertion of said entry after the decision made in the 7th GST Council Meeting to not tax land and building. The decision was pursuant to the proposal made in the 5th GST Council Meeting to levy GST on transfer immovable property (land and building) after taking note of the fact that there was no constitutional embargo to levy such GST and that service tax was not leviable on such transfers. The Gujarat HC did not place reliance on any other authorities or reasoning to decide that “land” is to be understood as “immovable property” and that the term “land” would also include “benefits arising from land”.

Placing sole reliance on legislative history to reach the conclusion that Para 5 of Schedule 3’s reference to “land” also includes “benefits arising from land” may be contested by the Tax Department on appeal, especially considering the huge revenue implications. The reliance placed on legislative history is prone to scrutiny when the Gujarat HC’s decision itself gives sufficient justification on why the original grant of leasehold rights (lease of land) is within the scope of supply albeit exempt from GST.¹⁰ In the earlier regime, a grant of leasehold rights or development rights was exempt from service tax on account of not qualifying as a “service”.¹¹ However, the same is not the case in the GST regime. As per the Gujarat HC’s reasoning, it is only the subsequent assignment of leasehold rights (not the original grant of lease) which is not leviable to GST.

Protective refund claims — Need of the hour

The taxpayers who have paid GST on assignment of leasehold rights may explore the option of refund. Grant of refund is subject to satisfying the burden of proof against unjust enrichment. Alternatively, the refund claim can be preferred by the recipient of services if the supplier has passed on the burden of tax to the recipient. Considering the Gujarat HC decision being the first of its kind, the revenue would most likely go on appeal and vigorously contest the matter. Nevertheless, it is imperative for taxpayers who have already paid GST on assignment of leasehold rights to file protective refund claims to ensure the same does not get barred by limitation.

Applicability of the Gujarat High Court’s decision in other States

It is a settled principle that the jurisdictional High Court’s decision is binding on tax authorities and taxpayers in that jurisdiction. Since identical issues are pending before various High Courts, the Gujarat High Court’s decision would have persuasive value and may likely influence the matters before other High Courts. Quite recently, the Bombay High Court has quashed an order demanding GST on assignment of leasehold rights and remitted the matter for fresh reconsideration by taking account of the Gujarat High Court’s decision.¹² While taxpayers in Gujarat have clarity on the GST treatment of assignment of leasehold rights, the taxpayers in other States await the issue to be settled. To put matters to rest, it is hoped that the GST Council recommends the Board to clarify that GST is not applicable on assignment of leasehold rights through a clarificatory circular.