The Purchase of land on a freehold basis or on a long-term lease basis (say for 99 years or a longer period) is a normal practice prevalent in most parts of India. Most projects in large metro cities like Delhi-NCR, Mumbai, Bangalore etc. are built on leasehold plots.
The important question that needs examination from a GST standpoint are whether such long-term lease arrangements are liable to GST. If yes, whether the lessee in eligible to claim input tax credit of GST paid on the one-time consideration paid for acquiring such leasehold rights.
Taxability of long-term leases
Under the Constitution of India, land is classified as a State subject and tax on land and building is considered as the state’s revenue vide Entry No 49 of List II – State List and thus outside the ambit of GST.
Whether long term lease of land (say for 99 years or even higher) for a one-time consideration (which is known as premium or salami etc.) can be equated with outright sale of land, has been a matter of intense judicial scrutiny under the erstwhile tax regime and other laws.
In the context of RERA regulations, the courts have held that a lease for 99 years or more is akin to a sale or mortgage. Mere use of the word ‘lease’ or the fact that a long term is fixed would not by itself make the arrangement a lease.
However, under the GST law, the term ‘supply’ has been defined in an inclusive manner to cover all forms of supply of goods or services such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for consideration by a person in the course or furtherance of business. Further, schedule II of the CGST Act specifically covers lease, tenancy, easement, license to occupy land as supply of service.
Given this, it appears that a lease of land (whether short term or long term) qualifies as ‘supply of service’ and hence is liable to GST.
Appreciating the fact that a long-term lease of land (for more than 30 years) is akin to a transfer of land per-se, GST exemption has been provided for select categories of lease arrangements provided by governments or government-aided organisations. The lease arrangements not within the ambit of the said exemption remain exposed to GST as supply of service.
Input tax credit (‘ITC’) eligibility
The other question for consideration is whether the lessee who intends to construct a building on this leasehold land can claim ITC of the GST so paid on leasehold consideration.
Recently, the advance ruling authorities of various states have ruled that ITC is not available in respect of GST paid on land lease transactions on account of specific restrictions carved out under section 17(5) of the CGST on goods and services supplied for construction of immovable property.
Given this, the department is challenging the credit eligibility of GST charged on consideration paid for acquisition of leasehold rights.
Ask from the Government
It is important for the Government to release a circular/guidance paper addressing the credit eligibility on long-term lease arrangements to avoid high stake litigation at a later stage. While clarifying the credit eligibility on long-term lease arrangements, the following factors should be taken into consideration:
- The restriction carved out under section 17(5) of the CGST Act, is limited to only those goods and services which have a direct nexus with the construction activity such as the services of an engineer or contractor or architect or an interior decorator etc.
- Provision of land is a sine-qua-non and the same cannot be considered as ‘input’ or ‘input service’ used for construction of an immovable property.
- The restrictions carved out under section 17 of the CGST Act should be read strictly and narrowly as seamless flow of credits is one of the fundamental principles behind implementation of GST.
(The article is authored by Kishore Kumar who is a Lead-GST and Customs at Taxmann Allied Services Pvt. Ltd.)
