Long-Term Leases Will Attract GST

Long-Term Leases Will Attract GST

Recently, the Authority for Advance Ruling (AAR) has given a couple of judgments that will increase the tax liability on land lease transactions. A common question was posed before the AAR in both cases—

Can assignment of rights under a lease agreement or payment of premium for a 99-year lease attract Goods and Services Tax (GST) or be exempt from it by treating it as a sale of land?

The judgment has come in favour of the tax department, with the AAR ruling that long-term leases can't be equated with sale of land which is exempt from GST. In the case before the West Bengal AAR, liquidator a garment manufacturer sought clarity on whether an assignment of lease rights to a third party could attract GST. The liquidator had argued that the law doesn't impose tax on transactions involving sale of an immovable property or any benefit arising out of it. So, the assignment should not attract GST.

In a similar case in Gujarat involving determination of tax liability on a one-time premium paid by a bidder to acquire a 99-year lease of a commercial land, the bidder used the same reasoning and argued that such transactions are only subject to stamp duty imposed by a state and not GST.

The AAR in both cases dismissed the arguments by relying on the definition of 'lease' in the Transfer of Property Act.

According to the AAR, 'leases' involve transfer of right to enjoy a property for certain or indefinite period. And so, quantum of time is not material as sale and lease are both distinct transactions. Experts agreed with the ruling but pointed out the need to differentiate between leases having end-use restrictions against those which are free from such limitations.