GST on Assignment of Leasehold Rights: What the Gujarat HC Verdict Means for Taxpayers
The levy of Goods and Services Tax (GST) on transactions related to land has been a contentious issue. One such debate has revolved around the taxation of assignment of leasehold rights, which allows a lessee to transfer their lease interest to another party. The Gujarat High Court recently ruled that GST is not applicable on assignment of leasehold rights, bringing significant relief to taxpayers but also raising new legal questions.
Background: The Legal Confusion on GST and Leasehold Rights
Under GST law, “services” are broadly defined as “anything other than goods”, with an exclusion for “sale of land and building” (Schedule III, CGST Act, 2017). This raised the question: Should leasehold rights be treated as “services” and taxed under GST?
Previously, under the Service Tax regime, leasehold rights were considered immovable property, making them non-taxable. However, GST’s introduction led to uncertainty, as the tax framework no longer explicitly excluded leasehold rights from its ambit.
The Gujarat High Court’s verdict in Gujarat Chamber of Commerce & Industry v. Union of India addressed this ambiguity, ruling that the assignment of leasehold rights does not qualify as a “service” under GST.
Key Findings of the Gujarat High Court
The Gujarat HC’s decision was based on the following reasoning:
1. Assignment of Leasehold Rights Is Not a Service
- The Court observed that a long-term lease (e.g., 99 years) is functionally equivalent to ownership. Hence, transferring leasehold rights is akin to the sale of immovable property rather than a service.
- Citing past judgments, the Court reinforced that sale and service are not interchangeable concepts, and since leasehold rights relate to immovable property, they do not constitute a “service” under GST.
2. Assignment Falls Under Schedule III – Activities Not Considered Supply
- The Court ruled that the transfer of leasehold rights constitutes a “profit à prendre”, meaning it grants a benefit arising from land and is, therefore, immovable property.
- GST was never levied on the sale of land/buildings under the Service Tax regime, and the GST Council had explicitly rejected proposals to tax land transactions.
- Accordingly, the assignment of leasehold rights falls under Para 5 of Schedule III, meaning it is not considered a supply under GST and is outside the tax net.
Implications of the Gujarat HC Verdict
1. Potential Refund Claims for Taxpayers
Taxpayers who have previously paid GST on assignment of leasehold rights may now consider filing protective refund claims. However, these refunds will depend on proving that the tax paid does not result in unjust enrichment—i.e., that the burden was not passed on to the buyer.
2. Expansion of Schedule III Interpretation
The Court’s broad interpretation of Schedule III suggests that other property-related rights (such as easements or development rights) could also be excluded from GST. This could trigger litigation as tax authorities may challenge this ruling in higher courts.
3. Tax Treatment in Other States
While the Gujarat HC ruling is binding in its jurisdiction, it serves as persuasive precedent for other states. The Bombay High Court has already quashed a GST demand on leasehold rights and referred the matter for reconsideration in light of the Gujarat ruling. Similar cases in other states may now be influenced by this decision.
Looking Ahead: Will GST Authorities Appeal?
The Gujarat HC’s verdict delivers substantial revenue implications, as leasehold assignments are significant transactions in industrial and real estate sectors. Given this, the Revenue Department may challenge this ruling in the Supreme Court to seek clarity at a national level.
Additionally, it remains to be seen whether the GST Council will issue a clarification or amendment to explicitly address this issue. Until then, businesses and taxpayers must navigate these uncertainties carefully.
Conclusion: Key Takeaways for Taxpayers
✅ Assignment of leasehold rights is not subject to GST, as ruled by the Gujarat High Court.
✅ Taxpayers who paid GST on such transactions may file refund claims, subject to conditions.
✅ Other High Courts may adopt a similar stance, but a Supreme Court ruling would provide finality.
✅ Businesses must stay updated on any further GST Council clarifications on leasehold rights.
For businesses dealing in leasehold property transfers, this ruling provides much-needed relief but also signals potential litigation ahead. Taxpayers must carefully evaluate past tax payments and prepare for potential refund claims or compliance adjustments.