Gujarat HC holds assignment of leasehold rights is not liable to GST

This Tax Alert summarizes the recent ruling ^[1] of the Gujarat High Court (HC). The issue pertains to levy of goods and services tax (GST) on assignment of leasehold rights by lessee (assignor) to a third party (assignee).

The key observations of the HC are:

• Immovable property is not defined under the CGST Act, however, the same is defined in the other enactments and it includes benefits arising out of land.
• The petitioner has transferred leasehold rights which is over and above the actual physical plot of land and building, encompasses incorporeal ownership right in such land and building such as the right to possess, to enjoy the income from, to alienate, or to recover ownership of such right from one who has improperly obtained the title. 
• In case of lease, the title over the plot remains with GIDC with all other rights reverting to it on expiry of lease period, whereas transaction of transfer of leasehold rights by the assignor in favour of assignee divest assignor of all the absolute rights in the property.
• Under the Service Tax law, even the development rights which are the benefits arising from land were not liable to tax. Leasehold right is in fact a greater right and interest in land than development rights. The principle under the service tax regime continues to apply under the GST regime.
• What is assigned by the assignor to the assignee is not only the land allotted by GIDC on lease but the entire land along with building which was constructed on such land. The same is a capital asset in the form of an immovable property.

Accordingly, HC held that assignment of leasehold rights is not leviable to GST.

Comments

• The recent ruling has resolved a longstanding dispute, favoring taxpayers. Distinguishing assignment from lease, the ruling emphasized on treating benefits arising out of land as immovable property.
• Businesses may need to consider whether the principles established by the High Court can be applied to determine the taxability of development rights under GST framework.
• Notably, the Telangana High Court in the case of Prahitha Construction Private Limited [TS-60-HC(TEL)-2024-GST] concluded that the transfer of development rights does not equate to the sale of land. Instead, it falls within the scope of "service" and thus, subject to GST.
• Taxpayers who have paid taxes on such assignments may explore the possibility of seeking refunds. An important consideration would be whether the two-year time limit for claiming refunds applies under given circumstances.
• It remains to be seen whether the Department will challenge the ruling before the Supreme Court.

^[1] TS-03-HC(GUJ)-2025-GST