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GST exemption on leasehold land transfer: Implications for industry, government, and the economy

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In a significant relief to businesses and industrial players, the Gujarat High Court has recently exempted the assignment of leasehold rights in Gujarat Industrial Development Corporation (GIDC) plots from Goods and Services Tax (GST). The Court held that such transactions do not qualify as a “supply of services” under GST, thereby making them non-taxable. 

The ruling has far-reaching implications for industries involved in acquiring, leasing, and transferring industrial plots across India, and has been widely welcomed. It will also significantly impact other industries, tax authorities, and the economy.

Following are the extended impact on industry and business:

  1. Boost to Industrial Investment

The exemption removes a significant financial burden on businesses involved in leasing industrial plots, making it more cost-effective to invest in industrial estates.

  • Lower cost of transactions: With no 18% GST levy, businesses save significantly on upfront costs during the transfer of leasehold rights.
  • Encouraging ease of doing business: The judgment reduces compliance requirements and ambiguity in taxation, making industrial land transactions simpler and more predictable.
  1. Relief for MSMEs and Startups

Micro, Small, and Medium Enterprises (MSMEs) and startups, which often operate with limited capital, will benefit greatly from the ruling. These entities frequently acquire leasehold land in industrial estates to set up operations and often transfer leasehold rights when expanding or restructuring. The exemption ensures that such critical transactions remain affordable.

  1. Precedent for Real Estate and Leasing Sector

The judgment reinforces the exclusion of immovable property transactions from the ambit of GST.

  • Applicability to other long-term leases: Industrial bodies in other states operating on similar models can rely on this precedent to seek GST exemptions on leasehold transfers.
  • Clarity in taxation of immovable property: This ruling may lead to a broader examination of whether other types of immovable property transfers, such as long-term commercial leases or residential leases, should also be excluded from GST.

Implications for tax authorities:

  1. Loss of Potential Revenue

The GST department may face a potential revenue shortfall, as long-term industrial lease transactions often involve significant consideration amounts. However, the judgment aligns with the principle that taxes on immovable property are traditionally outside the GST framework.

  1. Need for Clarification by GST Council

To prevent further disputes, the GST Council may issue a clarification or notification explicitly excluding the assignment of leasehold rights from the ambit of GST. This would ensure uniformity across states and prevent future litigation on similar matters.

  1. Possible Appeal in the Supreme Court

Tax authorities may consider appealing the Gujarat High Court’s decision in the Supreme Court, seeking clarity on whether leasehold assignments qualify as a “supply of services.” Until a final verdict is reached, businesses can continue to benefit from the current ruling.

Potential impact on policy and regulations:

  1. GST Policy on Immovable Property

The judgment underscores the need to distinguish between transactions involving immovable property and services. It may prompt policymakers to review and fine-tune GST rules related to real estate and leasing, ensuring clear guidelines for taxpayers.

  1. Harmonization with Exemptions under Notification No. 12/2017

The Court’s reliance on Notification No. 12/2017, which exempts long-term leases (30 years or more) provided by government entities, highlights the inconsistency in taxing similar transactions differently. This may lead to a broader exemption framework for assignments of leasehold rights across various sectors.

Broader impacts on  economy:

  1. Increased Competitiveness of Industrial Estates

By lowering transaction costs and reducing tax-related uncertainties, industrial estates managed by GIDC and similar bodies in other states become more attractive for businesses. This can lead to:

  • Higher occupancy rates in industrial estates
  • Increased foreign and domestic investment in manufacturing
  • Greater industrial output and job creation
  1. Strengthening State-Level Industrial Policies

States promoting industrial growth through industrial estates can leverage this ruling to offer more competitive terms to investors. With leasehold assignments becoming tax-free, states like Gujarat can position themselves as preferred destinations for industrial and manufacturing investments.

Conclusion

The Gujarat High Court’s decision on GST exemption for leasehold land assignments marks a significant step toward improving the ease of doing business and reducing tax-related ambiguities. It offers immediate relief to industries and MSMEs while potentially influencing GST policy and real estate taxation on a national scale. The ball is now in the GST Council’s court to provide clarity and ensure that similar benefits are extended across the country. Businesses, meanwhile, are hopeful for continued tax-friendly policies to foster industrial growth