INTRODUCTION
With the introduction of GST in India, the tax structure changed; however, the indirect tax structure has been simplified, and there is still a question of confusion. Questions have remained when it comes to applying GST to complex transactions such as assignment of leasehold rights. This raises a pertinent question: Does such an assignment constitute a “supply” under Section 7 of the GST Act and thereby attract GST or is it exempted as a transaction involving immovable property under Schedule III?[1]
This article looks at this contentious issue, using the landmark case of Panacea Biotec Ltd. and the pivotal judgment of the Gujarat High Court in GIDC to explore the statutory framework, judicial precedents, and legislative intent. By analysing whether the assignment of leasehold rights aligns with the GST Act’s definitions of “supply” or “sale of immovable property,” this discussion sheds light on a crucial intersection of taxation and property law, with significant implications for industrial and economic development.
BACKGROUND OF THE ISSUE
The grant of leasehold rights over land transfers the right to use and occupy land whether it is commercial, industrial, or residential, for a determinate period in terms of the lease.[2] One issue is what type of transaction is this, as the GST Act states the following:
Schedule II, Item No. 2 classifies leases, tenancies, and licenses to occupy land as a “supply of services.”
Schedule III, Item No. 5 excludes the “sale of land and building” from GST applicability.
Residential leases for residential purposes are generally exempt from GST, except in two cases:
- If the tenant is registered under GST, an 18% GST is payable by the tenant.
- The landlord must collect 18% GST for non-residential use if registered under GST.
For commercial property leases, GST at 18% applies regardless of the tenant’s GST registration.
The imposition of GST on the payment of lease/rent has some constitutional debates. Article 246A restricted GST to goods and services, giving some arguments that leasing property is not a service. Apart from that, Entry 49 of List II gives power to the state governments to levy the tax on transactions involving immovable property, and thereby, such payments can be excluded from GST.[3][4]
PANACEA BIOTEC CASE OVERVIEW
The Panacea Biotec case is one critical development in understanding the taxation of leasehold rights. The case was raised when the Maharashtra Industrial Development Corporation (MIDC) leased land to Panacea Biotec, which then assigned the lease to Mankind Pharma in 2022. GST authorities issued a show-cause notice stating that this assignment would be treated as a “supply of services” and attracted 18% GST. Panacea Biotec argued that the transaction was the transfer of land and thus exempt from GST.[5]
Key Issues[6]
- Whether the assignment of leasehold rights would amount to a “taxable supply” under the GST Act.
- Whether such transactions should be covered by the exemption of the “sale of land” under Schedule III of the CGST Act.
- Whether GST would attract double taxation since the transaction was already subject to stamp duty.
Arguments and Legal Provisions[7]
The argument of Panacea Biotec
Panacea Biotec argued the assignment of leasehold rights is a transfer of interest in an immovable property, which needs to be outside the purview of Schedule III of the GST Act. “The transaction amounts to transfer in the substance of a land, which is masquerading as an assignment of leasehold rights,” the company said.
Further, Panacea Biotec also raised the issue of double taxation as stamp duty had already been paid on the transaction, and the imposition of GST would amount to an unfair economic burden.
Relevant Provisions of the GST Framework
Schedule II, Clause 2(a): This provision treats leases, tenancies, and licenses to occupy land as a “supply of services.” Therefore, transactions involving the assignment of leasehold rights would ordinarily fall under this provision.
Schedule III, Entry 5: Excludes “sale of land and buildings” from the ambit of GST. In that case, any assignment of leasehold rights would fall under its purview if it was held to be a transfer of land.
Section 7(1): Defines “supply” very broadly concerning goods and services exchanged for consideration in the course of business. Schedule III, however, excludes land transactions.
Judgment Analysis and Inference[8][9]
The Bombay High Court ruled that the assignment of leasehold rights is a transfer of immovable property, akin to a sale, and thus exempt from GST. The court emphasized that the substance of the transaction—transferring all rights to the property—was more important than its form, and it fell within the exclusion of land sales under Schedule III. Additionally, the court noted procedural lapses by the GST authorities, as Panacea Biotec’s reply to the show-cause notice was not properly considered, violating natural justice and weakening the GST demand.
This landmark judgment provides relief to businesses by affirming that leasehold assignments should not be taxed under GST, preventing double taxation, as stamp duty had already been paid. The ruling underscores the principle that tax law must align with economic reality, recognizing the transfer of leasehold rights as a property transaction, not a service, and ensuring a tax regime that fosters business growth.
GIDC CASE AND ITS IMPACT
The Panacea Biotec case builds upon earlier judicial precedents, particularly the Gujarat High Court’s judgment in the GIDC case.[10]. In that case, the court held that the transfer of leasehold rights was a transfer of immovable property, not a service, and therefore exempt from GST. This decision laid the groundwork for Panacea Biotec and reinforced the principle that immovable property transactions, including leasehold assignments, fall outside the scope of GST.
The Gujarat High Court has specifically noted that the imposition of GST might be made applicable on ancillary charges like premium fees or transfer charges, in cases where the entities involved are providing permission for leasehold transfers, an example being the Gujarat Industrial Development Corporation (GIDC). However, GST is not applicable for the actual transfer of the leasehold rights.[11]
PARALLEL JUDGMENTS AND COMPARISONS
The issue has been similarly dealt with in other jurisdictions. For example, the Allahabad High Court determined in the case of Greater Noida Industrial Development Authority.[12] That land leased for commercial purposes is a taxable supply of services under the Service Tax regime. Similarly, in Tarkeshwar Sio Thakur Jiu v. Bar Dass Dey & Co. and Ors.[13] The court observed that leasehold rights are more similar to a sale of land, exempt under GST.
In Panacea Biotec, the courts followed the principles put forth in other cases and that leasehold right is a transfer of immovable property. Thereby, there is no levying of GST, and on Schedule III of the Act, the transaction holds an exemption on tax.
KEY ISSUES
Law substance over form:
A very critical aspect of the Panacea Biotec judgment is that the substance overrode the form of the transaction. For GST purposes, it is the substance of the transaction that is more important. An assignment of leasehold rights, though structured as a lease assignment, would fall within the ambit of the transfer of immovable property and hence, outside the GST.
Practical Implications
This ruling has serious practical implications for those industries that operate on long-term leases, like commercial, industrial, and real estate sectors. The ruling is reducing the cost of transactions and promoting business activity by exempting leasehold assignments from GST. The clarity given by the court makes it easier for businesses to structure their leasehold assignments without fear of additional tax burdens.
CONCLUSION: A WAY FORWARD
This is a landmark judgment of Panacea Biotec wherein it has clarified the application of GST on the assignment of leasehold rights. Affirming the said fact that such a transaction involves the transfer of immovable property, the court strengthened the decision for the exclusion of land transactions under Schedule III of GST.
This, apart from GIDC, is one of the cases, which shows the need for bringing more economic realities to tax law. The trend of the changing legal framework will see courts making more substance than form going well. This will be helpful for tax law to remain fair, and consistent with the principles of economic growth and development of business.
This judgment will, therefore, promote a business-friendly environment since tax billings that are unnecessary are removed, and confusion during the interpretation process of GST on leasehold transactions is done away with. The ruling is an important step forward in ensuring the proper application of GST and fostering a stable and predictable tax regime.
Author(s) Name: Devishi Karamchandani (Institute of Law, Nirma University, Ahmedabad)
References:
[1] Taxmann, Opinion, GST Chargeability on Assignment of Leasehold Rights: A Debate of Views, TAXMANN (27 January 2025) https://www.taxmann.com/post/blog/opinion-gst-chargeability-on-assignment-of-leasehold-rights-a-debate-of-views accessed 27 January 2025.
[2] Incorp Advisory, Assignment of Leasehold Rights on Land: Critical Analysis, INCORP ADVISORY (27 January 2025) https://incorpadvisory.in/blog/assignment-of-leasehold-rights-on-land-critical-analysis/ accessed 27 January 2025.
[3] Ibid.
[4] India Law Offices, Constitutional Validity of GST on Lease Rental Payment, INDIA LAW OFFICES https://www.indialawoffices.com/legal-articles/constitutional-validity-of-gst-on-lease-rental-payment accessed 27 January 2025.
[5] A2Z Taxcorp, Panacea Biotec Not to Pay 18% GST on Leasehold Land, Says Bombay HC, A2Z TAXCORP https://a2ztaxcorp.com/panacea-biotec-not-to-pay-18%25-gst-on-leasehold-land-says-bombay-hc accessed 27 January 2025.
[6] eFile Tax, Panacea Biotec Case: Bombay HC Rules Out 18% GST on Leasehold Land, EFILE TAX https://www.efiletax.in/blog/panacea-biotec-case-bombay-hc-rules-out-18-gst-on-leasehold-land/ accessed 27 January 2025.
[7] GST Press, Panacea Biotec Not to Pay 18% GST on Leasehold Land, Says Bombay HC, GST PRESS https://www.gstpress.com/news/cm6a7jud6040s10qmhscfi981/panacea-biotec-not-to-pay-18-gst-on-leasehold-land-says-bombay-hc?from_page=1 accessed 27 January 2025.
[8] CNBC TV18, Panacea Biotec Not to Pay 18% GST on Leasehold Land, Says Bombay HC, CNBC TV18 https://www.cnbctv18.com/market/stocks/panacea-biotec-not-to-pay-18-gst-on-leasehold-land-says-bombay-hc-19545565.htm accessed 27 January 2025.
[9] eFile Tax, Panacea Biotec Case: Bombay HC Rules Out 18% GST on Leasehold Land, eFILE TAX https://www.efiletax.in/blog/panacea-biotec-case-bombay-hc-rules-out-18-gst-on-leasehold-land/ accessed 27 January 2025.
[10] Gujarat Chambers of Commerce and Industry v. Union of India [2025] (1) TMI 516 (Gujarat High Court).
[11] BDO India, Tax Alert: Assignment of Leasehold Rights in Industrial Land Not Leivable to GST, BDO INDIA (9 January 2025) https://www.bdo.in/getmedia/2f98f8ba-2ac4-4936-9fe5-aa9f02e8b9c8/Tax-Alert_BDO-India_Assignment-of-leasehold-rights-in-industrial-land-not-leviable-to-GST_-09-Jan-2025-4_1.pdf accessed 27 January 2025.
[12] Greater Noida Industrial Development Authority v. Commissioner of Customs, Central [2015] (40) STR 95 (All.).
[13] Tarkeshwar Sio Thakur Jiu v. Bar Dass Dey & Co. and Ors. [1979] (3) SCC 106.
