Bombay High Court’s Decision of GST on Land Lease Upsets Petitioners

In response a petition filed by builders and developers, the Bombay High Court has decided that goods and services tax (GST) would be leviable on the one-time premium of a long-term lease of 30 years or more, as it is treated as a supply under the GST law.

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

The ruling was not in favour of the petitioners who believe that long-term leases should be considered as “sale of immovable property” as per the accepted principle and so they should be out of GST. As per the GST Act, short-term leases of less than 30 years are already subject to GST, but there is no GST on a lease of 30 years or more.

The petition was filed by builders and developers who recently won bids for land leasing in Navi Mumbai and Panvel in an auction held by City Industrial and Development Corporation of Maharashtra (CIDCO). The question of GST levy on the monthly rentals along with the one-time lease premium surfaced at the time of allotment letter issuance. The revenue department said that the land lease is a ‘supply’ under GST and therefore was taxable.

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There is no GST on the sale of land as it is constituted “immovable property” and is only taxable in the form of registration fees and stamp duty. However, the renting of an immovable property or construction of buildings is taxable under GST. The first sale of a newly constructed building is taxed under GST, but there is no GST on the sale of buildings after the first transaction.

“At this stage, it is necessary to start discussions on the 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.