IS GST APPLICABLE ON UP-FRONT PAYMENT FOR LONG TERM LEASE OF IMMOVABLE PROPERTY?
This issue has been settled by law, that Up-Front Payment for Long Term Lease (for e.g. 30, 60 or 99 Years) of an Immovable Property viz. Land, Building etc is liable for payment of GST.
1. Para 5 of Schedule III, read along with Section 7 of the Central Goods and Service Tax Act, 2017 excludes following transactions from the meaning of Supply of Goods or Supply of Services:-
“5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”
2. Para 5 (a) of the Schedule II, read along with Section 7 of the Central Goods and Service Tax Act, 2017 has provided that “Renting of Immovable Property” shall be treated as Supply of Services for the Purpose of GST Law;
3. Any extinguishment of Right in an Immovable Property (even through a Long Term Lease) is treated as Transfer of a Capital Asset with in the meaning of Section 2 (47) of the Income Tax Act, 1961;
4. Order of the Bombay High Court in the case of “Builders Association of Navi Mumbai, Neelsidhi Realties Versus Union of India Through the Secretary, Ministry of Finance, The Commissioner of Goods and Service Tax, Thane & Others” Writ Petition No. 12194 of 2017;
5. Services liable to NIL Rate of GST:-
(i) Services by way of renting of residential dwelling for use as residence (SCN 9963 / 9972)
(ii) renting or leasing of agro machinery or vacant land with or without a structure incidental to its use (SCN 9986)
(iii) Services by a person by way of- (a) conduct of any religious ceremony; (b) renting of precincts of a religious place meant for general public, owned or managed by an entity registered as a charitable or religious trust under section 12AA of the Income-tax Act, 1961 (hereinafter referred to as the Income-tax Act) or a trust or an institution registered under sub clause (v) of clause (23C) of section 10 of the Income-tax Act or a body or an authority covered under clause (23BBA) of section 10 of the said Income-tax Act: Provided that nothing contained in entry (b) of this exemption shall apply to,- (i) renting of rooms where charges are one thousand rupees or more per day; (ii) renting of premises, community halls, kalian mandapam or open area, and the like where charges are ten thousand rupees or more per day; (iii) renting of shops or other spaces for business or commerce where charges are ten thousand rupees or more per month. (SCN 9963 / 9972 / 9995)
It may be noted that unlike the decision given under the Erstwhile Service Tax Laws by several Courts and Judicial bodies, under GST all Lease Payments (other than covered under NIL Rated or Exempted) including Up-Front Payments for Long Term Lease are covered within the meaning of Renting of Immovable Property and chargeable to GST @18%.
OBSERVATIONS OF THE BOMBAY HIGH COURT (Writ Petition No. 12194 of 2017):-
The division bench of the Bombay High Court comprising of Justice S.C Dharmadhikari and Justice Prakash D. Naik observed that “On a plain reading of the GST Act, we do not see how we can agree with Petitioners. Mr Nankani also relies upon Schedule II, which is referable to section 7. These are the activities to be treated as the supply of goods or services. The substantive provision section 7 in clearest terms says that the activities specified in Schedule I made or agreed to be made without a consideration and the activities to be treated as the supply of goods or supply of services referred to in Schedule II would be included in the expression “supply”. However, clause (a) of sub-section (1) of section 7 includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”.
“We referred to the definitions simply to reinforce our conclusion that the CIDCO is a person and in the course or in furtherance of its business, it disposes of lands by leasing them out for a consideration styled as one-time premium. Therefore, if one refers to Schedule II, section 7, then, Item No. 2 styled as land and building and any lease, tenancy, licence to occupy land is a supply of service”, the bench said.
“Any lease or letting out of a building, including commercial, industrial or residential complex for business, either wholly or partly is a supply of service. It is settled law that such provisions in a taxing statute would have to be read together and harmoniously in order to understand the nature of the levy, the object and purpose of its imposition. No activity of the nature mentioned in the inclusive provision can thus be left out of the net of the tax. Once this law, in terms of the substantive provisions and the Schedule, treats the activity as supply of goods or supply of services, particularly in relation to land and building and includes a lease, then, the consideration therefor as a premium/one-time premium is a measure on which the tax is levied, assessed and recovered. We cannot then probe into the legislation any further”, the bench also observed. “It is entirely for the legislature, therefore, to exercise the powers conferred by sub-section (2) of section 7 of the GST Act and issue the requisite notification. Absent that notification, merely going by the status of the CIDCO, we cannot hold that the lease premium would not attract or invite the liability to pay tax in terms of the GST Act”, the bench added.
“It is entirely for the legislature, therefore, to exercise the powers conferred by sub-section (2) of section 7 of the GST Act and issue the requisite notification. Absent that notification, merely going by the status of the CIDCO, we cannot hold that the lease premium would not attract or invite the liability to pay tax in terms of the GST Act”, the bench added.