GST EXEMPTION ON UPFRONT AMOUNT ON LONG TERM LEASE OF LAND MORE THAN THIRTY YEARS

Under the CGST Act, a lease is treated as a supply of services if it only grants the right to use or occupy the asset without transferring ownership, for land vide Para 2(a) of Schedule II. While an outright sale of land remains entirely excluded from GST vide Para 5 of Schedule III to the Act. However the Act also provides conditional tax exemption on long term lease of land for more than thirty years for specific purposes. Here is its comprehensive analysis to avail the statutory benefits.

1.The concept of an upfront amount-traditionally referred to in property law as premium or salami-has its origins in Section 105 of the Transfer of Property Act, 1882, where it was established as the capitalized, one-time price paid to acquire long-term leasehold rights, distinct from the recurring "rent" paid for continuous occupation. The provisions of Section 105 are reproduced hereunder:

105. Lease defined.-

A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.

Lessor, lessee, premium and rent defined--

The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.

(i) SALAMI- What it is?

The term "salami" (or sala mi ) derives from the Arabic greeting sala m (peace/salutation) via Persian and Hindustani. Originally a customary monetary offering or token of respect presented when paying homage to a feudal lord or zamindar, the practice gradually institutionalized into a mandatory upfront entrance fee for securing tenancy or land rights. Over time, it was formalized into South Asian property and tax law as the capital "premium"-a one-time, non-recurring lump-sum paid to acquire an enduring leasehold right, distinct from regular, periodic rent.

2. During the pre-GST Service Tax era under the Finance Act, 1994, the taxation of long-term lease premiums on land was heavily contested; courts and tribunals frequently debated whether acquiring long-term leasehold interests amounted to a virtual transfer of land or a taxable renting service.To resolve widespread litigation and protect industrial development, the Central Government introduced Notification No. 41/2016-Service Tax, creating a targeted exemption for one-time upfront premiums charged by state industrial development corporations for long-term leases of industrial plots of thirty years or more. With the rollout of the GST regime on July 1, 2017, the legislature maintained this critical distinction. While Schedule III of the CGST Act explicitly excludes the outright sale of land from the GST net, Schedule II, Para 2 classifies any lease, tenancy, or license to occupy land as a supply of service under Heading 9972.

3.To preserve the economic relief provided under the former regime and prevent capital starvation in core manufacturing and financial zones, the pre-GST exemption was directly translated into the GST framework under Entry No. 41 of Notification No. 12/2017-Central Tax (Rate). This entry continues to grant conditional tax relief on upfront lease premiums, provided the long-term lease meets the statutory requirements of tenure, government ownership, and dedicated end-use for industrial or financial business infrastructure.

4.Meaning of "Upfront Amount" under the GST Framework Under the GST regime-specifically within the scope of Entry No. 41 of Notification No. 12/2017-Central Tax (Rate) under Heading 9972-an "upfront amount" is defined as the lump-sum consideration payable in respect of granting a long-term lease of land (typically for 30 years or more). The notification explicitly clarifies that the upfront amount includes amounts, called as premium, salami, cost, price, development charges, or referred to by any other nomenclature. Paid at the inception of the lease or upfront before the commencement of the term, distinguishing it from recurring/periodic considerations such as token annual rent or regular periodic lease rental payments.

5.The levy of GST on upfront amounts charged for long-term leases of land has been a subject of extensive litigation. While taxpayers frequently invoke the doctrine of "substance over form" or "merit over rituals" to claim relief, tax exemption jurisprudence demands a strict statutory construction. The entitlement to exemption under Entry No. 41 of Notification No. 12/2017-Central Tax (Rate) dated 28/06/2017 (under Heading 9972) supports on a delicate interplay between procedural compliance and substantive eligibility criteria.

A. The Entry No. 41 of Notification No. 12/2017-Central Tax (Rate) exempts upfront amounts (called premium, salami, cost, price, development charges, or by any other name) payable in respect of services by way of granting long-term leases of thirty years or more. Under the statutory text, four cumulative criteria must be satisfied to qualify for this NIL-rate benefit:

B. Tenure of Lease: The grant of lease must be for a period of thirty (30) years or more.

C. Character and Use of the Leased Plot: The property leased must consist of industrial plots or plots for development of infrastructure for financial business, situated in an industrial or financial business area.

D. Status of the Supplier (Lessor): The service provider must be a State Government Industrial Development Corporation or Undertaking, or an entity having 20 percent or more ownership of the Central Government, State Government, or Union Territory (held directly or via a wholly owned/controlled entity).

E. Status of the Recipient (Lessee): The service recipient must be an industrial unit or a developer in an industrial or financial business area.

6.The entry is further governed by mandatory provisos stipulating that the plots must be used exclusively for the allotted industrial or financial purpose, that the State Government shall monitor and enforce compliance, that change of land use triggers joint and several liability for back taxes with interest and penalties, and that lease instruments must incorporate a recital documenting the central tax exemption.

7. The foundational principles governing tax exemptions were established by the Constitution Bench of the Hon'ble Supreme Court in Commissioner of Customs (Import), Mumbai Versus M/s. Dilip Kumar And Company & Ors. - 2018 (7) TMI 1826 - Supreme Court (LB). While an ambiguity in a charging provision is resolved in favour of the assessee, an exemption clause-being an exception to the general tax net-must be strictly construed against the claimant and in favour of the Revenue. The burden rests squarely on the assessee to prove that his claim falls squarely within the statutory framework of the exemption. The Supreme Court drew a clear line between mandatory eligibility conditions and procedural or directory requirements. While the doctrine of substantial compliance ("merit over rituals") can excuse non-compliance with directory, administrative formalities, it cannot be invoked to relax mandatory eligibility conditions or dilute ambiguity in favour of the taxpayer.

8. The requirement that the leased land must consist of "industrial plots or plots for development of infrastructure for financial business" represents the substantive core-the umbilical cord-of Entry 41. Because this condition determines whether an exemption survives or fails, its boundaries must be analyzed against specific statutory definitions and the Tariff classifications of the GST Act, as examined by the West Bengal Appellate Authority for Advance Ruling in In Re: M/s. Anmol Industries Ltd. - 2025 (2) TMI 460 - APPELLATE AUTHORITY FOR ADVANCE RULING, WEST BENGAL.

9. Although "industrial activity" lacks an explicit dictionary definition in the CGST Act, statutory context and trade parlance dictate that it requires physical operations such as manufacturing, fabrication, processing, and assembly of materials into finished goods. It directly relates to structures such as factories, processing plants, workshops, refineries, and mills. From an HSN perspective, an industrial enterprise utilizing an industrial plot will typically operate under manufacturing tariff headings (for instance, HSN Chapter 19 for processed bakery goods or Chapter 33 for aromatic preparations). However, leasing land to build a "commercial office complex," corporate headquarters, or administrative chambers does not constitute industrial activity. Where tender covenants or lease conditions explicitly exclude "industrial buildings" (premises dedicated to processing, fabrication, and assembly), the land cannot qualify as an industrial plot, regardless of whether the lessee is registered as a manufacturing company on the GST portal.

10. A plot leased for "development of infrastructure for financial business" must be dedicated to hosting establishments that deliver financial services. As settled in Anmol Industries (supra), routine corporate accounting, financial monitoring, auditing, or treasury management carried out inside a commercial office does not constitute "financial activity". Every commercial entity manages accounts and financial records, treating internal bookkeeping as qualifying financial activity would render the statutory restriction meaningless. Instead, the activity must consist of rendering financial services to the market. This standard aligns with the statutory scope of Section 3(16) of the Insolvency and Bankruptcy Code (IBC) and the Service Accounting Codes (SAC) enumerated under Heading 9971 of the GST Tariff Group. Developing plots to accommodate these specified services fulfills the requirement for financial business infrastructure. Conversely, constructing commercial premises for general corporate space, retail setups, or multi-tenant sub-leasing falls outside Heading 9971 and fails the test.

11.Since the meaning of financial business/services is not defined under the CGST Act, the description of "financial services" defined under Section 3(16) of the IBC, 2016 are reproduced hereunder for ease of reference:

(16) "financial service" includes any of the following services, namely:-

(a) accepting of deposits;

(b) safeguarding and administering assets consisting of financial products, belonging to another person, or agreeing to do so;

(c) effecting contracts of insurance;

(d) offering, managing or agreeing to manage assets consisting of financial products belonging to another person;

(e) rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of-

(i) buying, selling, or subscribing to, a financial product;

(ii) availing a financial service; or

(iii) exercising any right associated with a financial product or financial service;

(f) establishing or operating an investment scheme;

(g) maintaining or transferring records of ownership of a financial product;

(h) underwriting the issuance or subscription of a financial product; or

(i) selling, providing, or issuing stored value or payment instruments or providing payment services;

12. The application of ratio in Dilip Kumar (supra) to Entry 41 demonstrates where the doctrine of substance over form succeeds and where it fails. The fourth proviso of Entry 41 mandates that lease agreements incorporate an express clause confirming that GST was exempted. Where an authority or lessor disputes taxability and charges GST in the tender, lessees cannot realistically insert an exemption clause. Because this requirement is procedural and directory ("ritual"), invoking substance over form protects the taxpayer; the mere absence of an exemption recital cannot defeat entitlement if all primary conditions are satisfied. However, the doctrine of substance over form cannot cure defects in mandatory eligibility conditions.

13. The requirement that the lessor have at least 20 percent government ownership cannot be replaced by demonstrating mere administrative control or statutory audit by the Comptroller and Auditor General (CAG), as seen in the case of autonomous port authorities governed by the Major Port Authorities Act, 2021. Similarly, the requirement that the plot be used for industrial manufacturing or Heading 9971 financial services cannot be substituted by the routine financial administration of a corporate office. For an upfront lease premium under Heading 9972 to secure exemption under Entry 41, the transaction must strictly satisfy the mandatory criteria, a verified lease period of at least thirty years, verifiable 20 percent government ownership in the lessor, and unambiguous dedication of the plot to manufacturing or recognized financial services infrastructure. While procedural omissions can be excused under substantial compliance, substantive statutory mandates cannot be bypassed.

14.The doctrine of "substance over form" serves as a shield against procedural technicalities, not a sword to rewrite statutory eligibility. Under Entry 41 of Notification No. 12/2017-Central Tax (Rate), omitting a contract recital is a pardonable ritual under Dilip Kumar (supra), but conflating a commercial office with an industrial plant, or internal corporate bookkeeping with Heading 9971 financial services, is a fatal failure of substantive merit. In tax exemption law, equity cannot manufacture qualification: unless the lessor meets the strict statutory ownership threshold and the land directly houses manufacturing or financial services infrastructure, the umbilical cord of the exemption is severed, and tax liability inevitably attaches.

Bottomline:

In the GST regime, tax exemptions are deliberate statutory deviations from the taxing baseline. A taxpayer must establish indisputable qualification within the four corners of the notification, for where ambiguity or non-compliance regarding eligibility exists, the benefit of the doubt belongs exclusively to the state.