GST on sale of lease hold land

[Kaustubh Karandikar]

XYZ is owning a factory which is situated on land taken on lease from the MIDC. XYZ is selling the entire factory along with assets and liabilities to PQR. In this process, XYZ is also selling the leasehold rights of the land on which the factory building is standing. GST authorities are asking to pay GST to the seller on transfer of leasehold rights. To avoid litigation if XYZ will pay GST on it, is PQR eligible to claim input tax credit on the same?

[Pradeep Reddy Unnathi Partners]

Hi Mr. Kaustubh Karandikar

Since the land is taken on lease from MIDC, XYZ may not have the right to transfer the leasehold rights to others. Typically where land is taken on lease from Govt (the MIDC), they do provide for a clause for the transfer of such lease to a new entity (PQR) subject to an initmation/approval from Govt. If that is the case, then it may not result in the transfer of lease hold rights. Am I missing something, can you please clarify?

Separately, the transfer of business (factory) as a going concern is exempt from GST.

[Shilpi Jain]

Many aspects to this.

Whether this can be claimed as a exemption as being sale of business?

Even if considered taxable whether the exemption given on lease premium for LT lease of industrial plots will apply to this case?

ITC in my view should be eligible for the recipient.

A detailed legal opinion/advice should besought on this matter considering the amounts and the legal issues involved.

[KALLESHAMURTHY MURTHY K.N.]

As far as GST is concerned, whether it is right or wrong, the transfer of the right of lease holding attracts GST at the applicable rate and the recipient can claim ITC when used in the course of furtherance of business.

[KALLESHAMURTHY MURTHY K.N.]

In continuation to my reply in Sl. No. 3 dated 25-02-2024, I found an AAR that the transfer of lease-holding rights is not entitled to avail ITC by the recipient.

Case Law:-

The AAR, Gujarat, in the case of M/s Bayer Vapi Private Limited [2023 (9) TMI 165 - AUTHORITY FOR ADVANCE RULING, GUJARAT] ruled that the transferee acquiring the rights of the lease for construction of the immovable property is not entitled to take Input Tax Credit (“ITC”) of the Goods and Service Tax (“GST”) paid by them on the services received by the Transferor by way of the lease as per Section 17(5)(d) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”).

Facts:

M/s Bayer Vapi Private Limited (“the Applicant”) is engaged in the manufacturing of chemicals for agriculture and health science applications, entered into a Memorandum of Understanding (“MOU”) with M/s Vapi Enterprises Ltd. (“the Transferor”) for transferring the rights of lease of the leasehold land owned by Gujarat Industrial Development Corporation (“the Owner”). As per the terms of the MOU, Applicant intended to use the aforesaid land to set up/expand its manufacturing facility for the manufacture of chemicals to be used by the Applicant in the course or furtherance of its business of manufacturing.

AI Summary

Input tax credit restriction: transferee may be barred from claiming ITC on GST for transfer of leasehold rights.
Leases from a government owner may be non transferable without approval, a transfer as a going concern may be GST exempt, and while some commentators say a transferee can claim ITC when used in business, an advance ruling found that a transferee acquiring lease rights for construction could not claim ITC of GST paid by the transferor, invoking the statutory exclusion; professional legal advice was recommended due to fact sensitive considerations.