Long-Term Leases Will Attract GST, Says Authority For Advance Ruling

Two recent decisions by the Authority for Advance Ruling will increase the tax liability on land lease transactions.

At the heart of both the rulings was a common question—can assignment of rights under a lease agreement or payment of premium for a 99-year lease attract goods and services tax or be exempt from it by treating it as a sale of land?

The AAR has answered the question in favour of the tax department, saying that long-term leases can’t be equated with sale of land which is exempt from GST.

The ruling may impact transactions by companies on multiple fronts, Rajat Bose, partner at Shardul Amarchand Mangaldas & Co., told BloombergQuint. "Assignment or transfer of contractual rights are quite common in transactions involving sale, mergers or demergers of businesses," he said. "Considering that all such activities may involve assignment of lease rights, factoring in the GST liability would assume importance."

Long-Term Leases ≠ Sale Of Land

Before the West Bengal AAR, liquidator of Enfield Apparels—a garment manufacturer—had 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.

Similarly, the Gujarat case involved determination of tax liability on a one-time premium paid by a bidder to acquire a 99-year lease of a commercial land. In this case too, the bidder used the same reasoning and argued that such transactions are only subject to stamp duty imposed by a state.

The AAR in both cases dismissed the arguments by relying on the definition of ‘lease’ in the Transfer of Property Act. It says that '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.

It’s important to give due precedence to the intention of parties to a lease, Ajinkya Gunjan Mishra, partner at L&L Partners said.

Bose added that while the AAR has arrived at the correct conclusion, multiplicity of existing litigation relating to GST on leases or similar transactions will mean that the issue is still likely to be litigated in future and will be ultimately decided by the Supreme Court.