In a significant ruling, the Gujarat High Court has held that the assignment of leasehold rights in land, where the transaction substantially resembles a sale of land, does not constitute a “supply” under GST. The judgment brings clarity to one of the more disputed issues in property-related indirect taxation: whether long-term or perpetual lease transfers attract GST.
Background and Legal Issue
The petitioner, a proprietorship firm, had been assigned leasehold rights in an industrial plot previously allotted to a partnership firm in a government industrial estate. The GST department issued a demand alleging that the transaction amounted to a taxable supply of service under Section 7(1)(a) of the CGST Act, 2017.
The petitioner contended that the transaction was in substance a sale of land, which is specifically excluded from the scope of GST by Entry 5 of Schedule III to the Act. Despite these arguments, tax and penalty were imposed under Section 74, leading to a constitutional challenge.
Legal Interpretation and Findings
The Gujarat High Court observed that the lease assignment involved:
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Long-term enjoyment and exclusive possession;
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Right to mortgage, assign, or transfer;
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Transfer of proprietary interest akin to ownership.
Accordingly, the transaction was held to be equivalent to a sale of land, which is not a supply within the meaning of Section 7(1)(a), as Schedule III overrides the general definition of supply.
The Court emphasized that merely calling a transaction a “lease” does not make it taxable. Where the lease transfers substantial and enduring rights, it falls under the non-taxable category of land sales.
The Court also clarified that such transactions do not fall under Entry 2(a) of Schedule II, which deals with temporary leases or licenses and classifies them as supply of services.
Law and Citations
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Section 7(1)(a), CGST Act, 2017 – Defines “supply”
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Entry 5, Schedule III, CGST Act – Sale of land is neither supply of goods nor supply of services
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Entry 2(a), Schedule II, CGST Act – License/lease of land = supply of service
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Section 74, CGST Act – Tax and penalty for suppression (not applicable where no supply exists)
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Sections 105 & 108, Transfer of Property Act, 1882 – Define lease and lessee rights
Judicial Precedent
Life Sciences Chemicals v. Union of India
[2025] 175 taxmann.com 540 (Gujarat)
Relied on:
Gujarat Chamber of Commerce and Industry v. Union of India
[2025] 170 taxmann.com 251 / [2025] 94 GSTL 113 (Guj.)
Conclusion
The Gujarat High Court has reaffirmed that substance prevails over form in tax law. Where leasehold rights amount to a virtual transfer of land ownership, the transaction is excluded from GST as per Schedule III.
This ruling provides valuable legal certainty for land-allottees, industrial transferees, and authorities dealing with leasehold property transfers under the CGST regime.
