The issue regarding GST applicability on lease transactions has been an issue of disagreement by the taxpayer as the law does not seeks to distinguish between the long term lease such as that of 99 years which actually has the character of “sale”. The definition of supply under section 7 of the CGST Act, 2017 includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course of furtherance of business. Consequently, the activity of lease is specifically included in the meaning of supply and is liable to GST. Now, the question arises is whether the transaction of long term lease, granted for 99 years is liable to GST or not? This issue was considered by the Rajasthan Authority for Advance Ruling in the case of M/s GREENTECH MEGA FOOD PARK PVT. LTD. and is the subject matter of discussion in the present update.
The Ministry of Food Processing Industries, Government of India (MOFPI) has granted approval to the applicant company to set up a Mega Food Park. As part of the development or setting up of the Food Park, the applicant company has identified/developed certain individual plots on the project site for the purpose of transferring the plots for a lease of 99 years and setting up of industrial units in accordance with the Scheme Guidelines. The applicant company wishes to enter into agreements with several lessees for a total period of 99 years for separate industrial units situated in Mega Food Park for a consideration towards booking and allotment of developed plot. The question placed before the AAR was whether lease agreement between the applicant company and the lessee for a period of 99 years is a sale of immovable property and is exempt from levy of GST?
The AAR referred to entry no. 2(b) of Schedule II wherein it is stated that any lease or letting out of the building including commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services. Since the meaning of lease was not given in CGST Act, 2017, reference was made to Transfer of Property Act, 1992 and it was concluded that the quantum of time for which lease is granted has no relevance and even perpetuity lease such as lease of 99 years is liable to GST. Reliance was also placed on Hon’ble Mumbai High Court decision in the case of BUILDERS ASSOCIATION OF INDIA VERSUS UNION OF INDIA wherein long term lease of 60 years was held liable to GST. It was also held that from the lease agreement, lessee has many restrictions as regards further sale of allotted plot whereas in case of transaction of sale, the sale deed purchaser becomes the absolute owner of the plot and is not dependent on the lessor for renewal or extension of the lease period. It was also held that merely charging stamp duty will not change transaction of lease to sales. As the activity of leasing of land by government, local authority or governmental authority or government entity is only exempt, the present transaction is liable to GST at the rate of 18%.
The dispute regarding liability of service tax on long term lease stems from erstwhile taxation regime and it has been consistently held that the period of lease does not lead to considering the transaction of lease as that of sales so as to exempt it from levy of service tax. Similar view is being taken in the GST era also and so the activity of leasing land by any assessee other than government is liable to GST even if the lease is for a period as long as 99 years.
However, it was basic intention of GST that transfer of immovable property was outside the net of GST as stamp duty is paid on the same. It comes under the preview of state Government. But now both the taxes are being charged on such lease of 99 years. It is very cumbersome position. Unless and until, these all laws are merged and only GST is applicable, there will be no immunity to poor assessee.
This is solely for educational purpose.