GST on Assignment of Leasehold Rights of Industrial Land: A Detailed Analysis of the Gujarat High Court Judgment

1. Introduction

The levy of Goods and Services Tax (GST) on transactions involving immovable property has emerged as one of the most complex and frequently litigated areas under the GST regime. This complexity stems from the inherent constitutional and legal distinction between taxation of goods and services on one hand, and the long‑settled treatment of immovable property transactions—traditionally governed by stamp laws and property statutes—on the other. While the GST framework sought to subsume multiple indirect taxes into a unified tax system, it consciously refrained from disturbing the existing fiscal treatment of land and buildings.

Accordingly, sale of land and sale of building have been expressly excluded from the ambit of GST by virtue of Entry 5 of Schedule III to the Central Goods and Services Tax Act, 2017 (“CGST Act”), which declares such transactions to be neither a supply of goods nor a supply of services. This statutory exclusion reflects a clear legislative intent to keep transfers of immovable property outside the GST net, consistent with the constitutional scheme and the continued levy of stamp duty by States.

However, despite this express exclusion, significant controversies arose when tax authorities began seeking to levy GST on assignment of long‑term leasehold rights, particularly in cases involving industrial plots allotted on long‑term leases (typically 99 years) by statutory development authorities such as the Gujarat Industrial Development Corporation (GIDC). The Revenue authorities proceeded on the premise that assignment of leasehold rights constituted a form of “transfer of the right to use land” or “leasing service”, and therefore amounted to a taxable supply of services under Section 7 read with Schedule II of the CGST Act.

This interpretational approach led to widespread issuance of summons, show cause notices, and audit objections across Gujarat, exposing industrial units, assignees, and financial institutions to substantial GST demands—often in addition to full stamp duty already paid on such transactions. The resulting uncertainty had serious commercial ramifications, particularly for restructuring transactions, insolvency resolutions, and secondary transfers of industrial land.

The controversy ultimately culminated in a landmark judgment of the Hon’ble Gujarat High Court in Gujarat Chamber of Commerce and Industry & Ors. v. Union of India & Ors. (pronounced on 03.01.2025), wherein the Court authoritatively settled the legal position by holding that assignment of leasehold rights is not exigible to GST, as such assignment amounts, in substance and in law, to a transaction involving transfer of immovable property. The Court decisively rejected the Revenue’s attempt to artificially characterise an absolute transfer of proprietary rights as a supply of services.

This article undertakes a detailed examination of the statutory framework under the GST law, the competing interpretations advanced by the assessees and the tax authorities, and the ratio decidendi laid down by the Hon’ble Gujarat High Court. It also seeks to clearly delineate the critical legal distinction between a grant of lease, which may attract GST as a service, and an assignment of lease, which stands on an entirely different footing as a transfer of immovable property outside the GST regime.

2. Typical Structure of Industrial Leasehold Transactions

In Gujarat, industrial land is predominantly developed and allotted by the Gujarat Industrial Development Corporation (GIDC), a statutory body constituted under the Gujarat Industrial Development Act, 1962, acting as the nodal agency of the State Government for planned industrialisation. The allotment of such land follows a fairly uniform and legally structured model, which may be summarised as under:

1. Long-term leasehold allotment: Industrial plots are not sold outright but are allotted on a long-term lease, typically for a period of 99 years, thereby conferring substantial and enduring rights in land while formally retaining ultimate ownership with GIDC.
2. Upfront premium and recurring rent: At the time of allotment, the allottee is required to pay a substantial one-time upfront premium, which economically represents the price of land, along with a nominal annual lease rent. Such premium is fixed taking into account market value, development costs, and infrastructure provided by GIDC.
3. Execution of registered lease deed: Upon fulfilment of allotment conditions, including commencement of industrial activity and payment obligations, a duly stamped and registered lease deed is executed. The lease deed incorporates detailed covenants governing use of land, transfer restrictions, forfeiture, and rights and liabilities of the lessee.
4. Right to assign leasehold interest: Importantly, the lease deed expressly permits assignment of leasehold rights in favour of a third party, subject to prior approval of GIDC and compliance with stipulated conditions. Such assignment results in complete substitution of the assignee in place of the original lessee.
5. Stamp duty on assignment: Transactions involving assignment of leasehold rights are subjected to stamp duty under the applicable Stamp Act, typically at rates equivalent to conveyance of land, thereby recognising such assignment as a transfer of immovable property for fiscal purposes.

With the introduction of the GST regime with effect from 01.07.2017, this long-settled transactional structure came under scrutiny. GST authorities across the State issued summons and show cause notices proposing levy of GST at the rate of 18% on the lump-sum consideration received upon assignment of leasehold rights, proceeding on the premise that such assignment constituted a taxable supply of services, namely a form of leasing or transfer of right to use land. This approach effectively sought to overlay GST on transactions already subjected to full stamp duty, giving rise to widespread litigation and industry concern.

3. Statutory Framework under GST

3.1 Scope of Supply – Section 7

Section 7 of the CGST Act is the charging gateway provision which determines whether a particular transaction can at all be brought within the GST net. Section 7(1)(a) provides an inclusive definition of the term “supply” and states that all forms of supply of goods or services or both—such as sale, transfer, barter, exchange, licence, rental, lease or disposal—made for a consideration in the course or furtherance of business shall constitute supply.

Two aspects of this provision are of critical importance. First, the legislature has consciously used expansive language by employing the expression “includes”, thereby indicating that Section 7(1)(a) is not exhaustive but illustrative. Secondly, mere existence of consideration is not sufficient; the transaction must also be in the course or furtherance of business. This requirement assumes significance in cases of one-time or occasional transfers of property rights, such as assignment of leasehold interests.

However, the scope of Section 7(1) is expressly curtailed by Section 7(2), which operates as a statutory exclusion clause. Section 7(2) mandates that notwithstanding the wide language of sub-section (1), activities or transactions specified in Schedule III shall be treated as neither a supply of goods nor a supply of services. Thus, if a transaction falls within Schedule III, it is taken completely outside the charging framework of GST.

3.2 Schedule III – Neither Supply of Goods nor Services

Schedule III embodies the legislative intent to exclude certain transactions altogether from GST, irrespective of the presence of consideration or business nexus. Entry 5 of Schedule III reads as under:

“Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”

By placing sale of land in Schedule III, the legislature has categorically declared that transactions involving transfer of land are not to be treated as supply under GST. This exclusion is absolute and unqualified, and reflects the constitutional understanding that taxes on land and buildings are distinct from taxes on goods and services. It also preserves the States’ exclusive domain to levy stamp duty on such transactions.

Significantly, the expression used is “sale of land” and not merely “conveyance of land”. The breadth of this phrase assumes importance in determining whether transfers of interests in land—recognised under property law as immovable property—are also intended to be excluded from GST.

3.3 Schedule II – Supply of Services

Schedule II performs a different function. It does not create a charge but merely classifies certain activities either as supply of goods or supply of services, provided they already qualify as supply under Section 7(1). Paragraph 2 of Schedule II treats lease, tenancy, easement, licence to occupy land as supply of services. This classification is premised on the fact that a lease involves creation of a limited right to enjoy immovable property, without transfer of ownership or absolute interest.

Thus, Schedule II proceeds on the footing that leasing arrangements represent ongoing service relationships between lessor and lessee. In contrast, Schedule III excludes transactions which result in transfer of proprietary rights in land.

It is this apparent overlap—and the fine but crucial distinction—between lease of land (classified as service) and sale of land (excluded from GST) that became the central axis of the litigation. The controversy before the Gujarat High Court essentially turned on whether assignment of long-term leasehold rights is closer in character to a lease (service) or to a sale of land (transfer of immovable property), and whether such assignment can legitimately be brought within Schedule II despite the exclusion contained in Schedule III.

4. Core Issue before the Gujarat High Court

Whether assignment of long-term leasehold rights in land, for a lump-sum consideration, constitutes a transaction which can be characterised as a continuing or recurring supply of service within the meaning of Section 7 read with Schedule II of the CGST Act, thereby attracting GST; or, alternatively, whether such assignment represents an absolute and irrevocable transfer of proprietary interest in immovable property, recognised under general property law as a benefit arising out of land, which consequently falls within the exclusion carved out under Entry 5 of Schedule III to the CGST Act and remains wholly outside the scope of GST.

Stated differently, the core legal issue was whether the transaction must be examined on the basis of its legal substance and effect, namely extinction of the assignor’s interest in land and substitution of the assignee in its entirety, or whether it could be artificially dissected and re-labelled by the taxing authorities as a mere permission to use land or a leasing arrangement so as to bring it within the GST charging provisions.

5. Arguments of the Petitioners (Industry & Trade Bodies)

The petitioners, led by Gujarat Chamber of Commerce and Industry (GCCI), advanced a multi‑layered challenge to the proposed levy of GST on assignment of leasehold rights, founded upon settled principles of property law, fiscal jurisprudence, and legislative intent. Their principal contentions, elaborated below, went far beyond a mere textual reading of the GST statute and invited the Court to examine the true legal nature of the transaction:

1. Leasehold rights constitute immovable property:
• Relying upon Section 105 of the Transfer of Property Act, 1882, the petitioners submitted that a lease is not a mere contractual permission but a statutory transfer of a right to enjoy immovable property for a specified term.
• Such right, though limited in duration, is nevertheless a proprietary interest recognised by law.
• Further reliance was placed on the definition of “immovable property” under the General Clauses Act, 1897, which expressly includes “benefits arising out of land”. Leasehold rights, being rights that arise directly from land, squarely fall within this expression.
• Judicial precedents were cited to demonstrate that leasehold interests have consistently been treated as immovable property for purposes of transfer, registration, stamp duty, and enforcement.
2. Assignment results in absolute transfer of leasehold interest:
• The petitioners emphasised the vital distinction between a sub‑lease and an assignment.
• In an assignment, the lessee transfers the entire bundle of rights vested in him under the lease deed to the assignee, without reserving any reversionary interest.
• Upon such assignment, the assignor completely steps out of the legal relationship, and the assignee is substituted in his place vis‑à‑vis the original lessor.
• The transaction thus effects an extinction of the assignor’s interest in immovable property, a characteristic feature of a sale rather than a service.
3. Absence of any element of service:
• It was contended that a “service”, by its very nature, presupposes some form of continuing obligation, performance, or facilitation by the supplier for the benefit of the recipient.
• Assignment of leasehold rights, on the contrary, is a one‑time, irreversible transfer of proprietary interest, after which no obligation, activity, or service is rendered by the assignor.
• A transaction resulting in complete divestment of rights cannot, either conceptually or legally, be characterised as a supply of service under the GST framework.
4. Consistency with stamp duty law and avoidance of double taxation:
• The petitioners pointed out that under the applicable Stamp Acts, assignment of leasehold rights is subjected to stamp duty at rates equivalent to conveyance of land.
• This statutory treatment reflects the long‑standing fiscal recognition of such assignments as transfers of immovable property.
• Levying GST on the same transaction would result in impermissible double taxation on a single composite transfer, defeating the very objective of GST to avoid cascading of taxes.
5. Legislative intent and historical continuity:
• It was submitted that GST was never intended to subsume or override stamp duties, which continue to operate in a separate constitutional field.
• Even under the erstwhile service tax regime, transfer of title or interest in immovable property was expressly excluded from the definition of “service”.
• The deliberate inclusion of “sale of land” in Schedule III of the CGST Act was argued to be a conscious legislative reaffirmation of this long‑standing policy choice.

On the cumulative strength of these submissions, the petitioners urged that assignment of leasehold rights is, in substance and effect, a transaction in immovable property and therefore lies wholly outside the ambit of GST.

6. Revenue’s Stand

The tax authorities, on the other hand, sought to justify the levy of GST on assignment of leasehold rights by adopting a strict and literal interpretation of the charging provisions under the CGST Act. Their principal arguments may be elaborated as follows:

1. Wide amplitude of Section 7 – inclusion of transfer and lease:
• The Revenue contended that Section 7(1)(a) employs deliberately broad language and expressly includes within the scope of “supply” transactions such as sale, transfer, licence, rental and lease.
• According to the tax authorities, the use of the term “transfer” is wide enough to encompass assignment of leasehold rights, and therefore such transactions cannot be excluded merely because they pertain to immovable property.
• It was argued that once a transaction answers the description of “transfer” for consideration in the course or furtherance of business, it squarely falls within the charging provision.
2. Limited exclusion under Schedule III:
• The Revenue emphasised that Schedule III excludes only sale of land and sale of building, and not all transactions relating to land.
• It was contended that had the legislature intended to exclude transfer of leasehold rights or interests in land, it would have done so expressly.
• On this reasoning, assignment of leasehold rights was sought to be treated as falling outside the narrow exclusion of Schedule III.
3. Characterisation as transfer of right to use land:
• The tax authorities argued that assignment does not amount to transfer of ownership in land but merely transfers the right to use and enjoy land for the unexpired portion of the lease term.
• Such transfer, according to the Revenue, is akin to leasing or licensing of land, which is expressly classified as a supply of services under Paragraph 2 of Schedule II.
• The absence of absolute ownership in the assignee was relied upon to assert that the transaction remains in the nature of a service rather than a sale.
4. Irrelevance of stamp duty treatment:
• The Revenue further submitted that levy of stamp duty on assignment of leasehold rights is not determinative of GST liability, since stamp duty and GST operate in distinct fields.
• According to the authorities, payment of stamp duty as a conveyance does not ipso facto convert a transaction into a sale of land for GST purposes.

On the basis of the above reasoning, the tax authorities maintained that assignment of leasehold rights constitutes a taxable supply of services under the GST law and is not protected by the exclusion contained in Schedule III.

7. Findings and Ratio of the Gujarat High Court

The Hon’ble Gujarat High Court, after an exhaustive examination of the statutory provisions, constitutional framework, and settled principles of property law, unequivocally rejected the contentions advanced by the Revenue. The Court’s findings, which collectively form the ratio decidendi of the judgment, may be elaborated as under:

7.1 Leasehold Rights are Immovable Property

At the threshold, the Court reaffirmed the long‑settled legal position that leasehold rights are not merely contractual or permissive rights but constitute immovable property in the eyes of law. Relying upon the definition of “immovable property” under the General Clauses Act, 1897, and the scheme of the Transfer of Property Act, 1882, the Court held that:

• Leasehold rights are clearly “benefits arising out of land”, and therefore fall squarely within the ambit of immovable property.
• Such rights have consistently been treated as immovable property for purposes of transfer, inheritance, registration, and levy of stamp duty.

By recognising leasehold rights as immovable property, the Court laid the foundational premise that any transaction resulting in transfer of such rights must be examined through the lens of property law, and not merely through the expanded definitions contained in taxing statutes.

7.2 Assignment is Equivalent to Sale of Land

The Court then drew a critical and decisive distinction between a lease of land and an assignment of leasehold rights, emphasising that the two transactions operate in fundamentally different legal spheres.

• In a lease, there is creation of a limited right to enjoy land for a specified period, while ownership and reversionary interest continue to vest with the lessor, giving rise to an ongoing jural relationship between the parties.
• In contrast, an assignment of lease involves a complete and absolute transfer of the lessee’s entire interest in the land to a third party, without retention of any reversion or residual right by the assignor.

The Court noted that upon execution of an assignment:

• The assignor completely exits the transaction and ceases to have any legal relationship with either the land or the lessor.
• The assignee steps fully into the shoes of the original lessee and assumes all rights, obligations, and liabilities under the lease deed.
• The transaction results in extinction of the assignor’s interest in the immovable property.

On these characteristics, the Court held that assignment of leasehold rights is, in substance and effect, indistinguishable from a sale or conveyance of land for the unexpired lease period, notwithstanding the absence of absolute ownership in the strictest sense.

7.3 Covered by Schedule III

Having characterised assignment of leasehold rights as a transfer of immovable property, the Court proceeded to examine the applicability of Schedule III to the CGST Act. Adopting a purposive and contextual interpretation, the Court held that:

• Entry 5 of Schedule III, which excludes “sale of land”, cannot be read in a narrow or pedantic manner.
• The expression “sale of land” necessarily includes transfer of interests in land which are recognised by law as immovable property, including leasehold interests.
• To interpret Schedule III otherwise would defeat the legislative intent and result in indirect taxation of immovable property through artificial characterisation.

Accordingly, the Court concluded that assignment of leasehold rights squarely falls within the exclusion contemplated by Schedule III and is therefore neither a supply of goods nor a supply of services under the GST regime.

7.4 No Supply of Service

Finally, the Court decisively rejected the Revenue’s attempt to classify assignment of leasehold rights as a supply of service under Schedule II. The Court observed that:

• A “service” necessarily postulates an element of performance, obligation, or facilitation by one person for another.
• An absolute and one‑time transfer of proprietary rights, which results in complete divestment of the transferor, lacks any element of service.
• Conceptually and jurisprudentially, the notions of “sale” and “service” are mutually exclusive, and one cannot be artificially converted into the other for the purposes of taxation.

The Court thus held that assignment of leasehold rights cannot, by any interpretative process, be re‑characterised as a supply of services merely to bring it within the ambit of GST.

8. Distinction Clarified: Grant of Lease vs Assignment of Lease

Thus, while grant of lease (including by private parties) may attract GST, assignment of lease does not.

9. Practical Implications

1. GST demands on assignment of GIDC leasehold plots are unsustainable: In view of the authoritative pronouncement of the Hon’ble Gujarat High Court, any demand of GST on consideration received for assignment of leasehold rights in GIDC plots lacks legal foundation. Such demands are contrary to the statutory exclusion under Schedule III and the settled characterisation of assignment as transfer of immovable property. Consequently, existing GST demands raised on this basis are liable to be set aside as without authority of law.
2. Ongoing investigations and show cause notices are liable to be quashed: Investigations, summons, audit objections, and show cause notices initiated solely on the premise that assignment of leasehold rights constitutes a taxable supply of services cannot be sustained. Where the foundational assumption of taxability fails, all consequential proceedings must necessarily fall. Assessees facing such actions are entitled to rely upon the judgment to seek quashing of proceedings at the adjudication or writ stage, as the case may be.
3. Transactions will continue to attract stamp duty, but not GST: The judgment reinforces the long-standing fiscal position that assignment of leasehold rights is subject to stamp duty under the applicable Stamp Acts, typically at rates equivalent to conveyance of land. However, such transactions stand excluded from GST. This delineation preserves the constitutional balance between indirect taxation under GST and State levy of stamp duty, and removes the spectre of double taxation on the same transaction.
4. Importance of careful drafting of transactional documents: While the judgment settles the substantive law, its benefit will accrue only where the transaction is demonstrably an assignment in law and in substance. Care must therefore be taken in drafting agreements, deeds, and related documents to ensure that:
• the entire leasehold interest is transferred without reservation;
• the assignor exits the transaction completely;
• the assignee is substituted in place of the lessee vis-à-vis the lessor; and
• the transaction is not structured or described as a sub-lease, licence, or mere permission to use land.

Clear and precise drafting aligned with the legal attributes of an assignment will be crucial to avoid future disputes and to ensure that the transaction squarely falls within the exclusion recognised by the Court.

10. Conclusion

The judgment of the Hon’ble Gujarat High Court brings much-needed certainty to industrial land transactions. By recognising assignment of leasehold rights as transfer of immovable property, the Court has aligned GST law with settled principles of property law, legislative intent, and constitutional scheme.

This ruling is of immense significance for industry, financial institutions, insolvency transactions, and real estate structuring, and is likely to be cited as a leading authority across India on the taxability of property-related transactions under GST.

- Adv CA Hardik Kakadiya

About the Author: The author is a practicing Chartered Accountant and legal professional based in Gujarat, with extensive experience in GST litigation, indirect tax advisory, and matters involving industrial land, leasehold rights, and regulatory compliances. He regularly advises industrial clients, financial institutions, and professional bodies on complex issues at the intersection of tax law and property law, and is actively involved in professional and Bar-related initiatives aimed at legal education and policy discourse.

Disclaimer: This article is for academic and informational purposes and does not constitute legal advice.