2023 (4) TMI 300 - AAR - GST

90-year lease arrangement for commercial units constitutes taxable supply under GST, not sale exemption

AAR Gujarat ruled that a 90-year lease arrangement for commercial units constitutes a taxable supply under GST, not a sale. The applicant's practice of ... Scope of supply - one time premium from the lessee - Applicant wishes to allot developed units to prospective buyers on a long term lease basis for a period of 90 years. - HELD THAT:- The agreement made between the applicant, GSRTC, Hubtown and the lessee for 90 years can by no stretch of imagination be termed as a sale but in fact is a lease, as the nomenclature suggest with many restrictions though with a right to further sublet in favour of third parties, for residue period of lease only in the manner set out in the lease deed subject further to the condition that in case there is violation of any condition by lessee, the lease deed will automatically be treated as cancelled. Whereas, in ordinary course assuming that a person purchases a commercial plot/unit, he becomes an absolute owner of the plot/unit and there is sale deed between seller and purchaser- in the present case, the lessee has to pay to the lessor ie GSRTC, advance annual lease rental of Re 1/- per square metre for the built up area of the leased premises for the first three years and thereafter the same shall be enhanced by 200% for every subsequent block of 10 years or part thereof. The lease of plot for 90 years by the applicant is not “sale of land” but is a lease and therefore, does not fall within the ambit of clause 5 of Schedule III of CGST Act, 2017. Hence, it is concluded that this activity i.e. lease of commercial units on payment of one time lease premium and annual premium is a ‘supply’ falling within the ambit of section 7(1) of CGST Act, 2017, which defines supply as “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” read with clause 2 of Schedule II of CGST Act, 2017, which specifies that lease of a land or building as a supply. The one time premium received by the applicant on allotment of completed commercial units/building is taxable supply in terms of section 7 of the CGST/GGST Act, 2017 - the supply of the applicant is classified under SAC 9972 and would be leviable to tax at the rate of 18% (i.e. 9% CGST and 9% SGST) in terms of notification No. 11/2017-CT(Rate) dated 28.6.2017. Issues Involved:1. Whether the one-time premium received by the applicant on allotment of completed building would be treated as taxable supply.2. If treated as taxable supply, what will be the applicable rate of tax.Summary:Issue 1: Whether the one-time premium received by the applicant on allotment of completed building would be treated as taxable supply.The applicant, engaged in the construction of immovable properties, sought an advance ruling on whether the one-time premium received for allotting commercial units on a long-term lease of 90 years would be treated as a taxable supply. The applicant argued that this should be considered a sale of building post-completion, thus not attracting GST as per Schedule III, Entry 5 of the CGST Act, 2017. However, the authority noted that the applicant does not hold the title of the property, and the transaction is essentially a lease, not a sale. The lease of 90 years does not equate to a sale since the ownership remains with GSRTC, and the lessee only acquires leasehold rights.The authority referenced Section 7 of the CGST Act, defining 'supply' to include leases, and Schedule II, which treats leases as a supply of services. They concluded that the lease of commercial units on payment of one-time and annual premiums is a 'supply' under Section 7(1) of the CGST Act, 2017. This view was supported by the Bombay High Court's decision in Builders Association of Navi Mumbai, which upheld GST on one-time lease premiums.Issue 2: Applicable rate of tax if treated as taxable supply.The authority classified the supply under SAC 9972 as 'Real estate services' and determined that it would be liable to GST at the rate of 18% (9% CGST and 9% SGST) as per notification No. 11/2017-CT(Rate) dated 28.6.2017.Ruling:(i) The one-time premium received by the applicant on allotment of completed commercial units/building is a taxable supply under Section 7 of the CGST/GGST Act, 2017.(ii) The supply is classified under SAC 9972 and is subject to GST at the rate of 18% (9% CGST and 9% SGST).