Input tax credit on leasehold rights over land
In the case of Bayer Vapi Private Limited, 2023-VIL-177-AAR, the Authority for Advance Rulings dealt with the issue of admissibility of input tax credit on grant of leasehold rights.
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Vapi Enterprises Limited (‘VEL’) executed a lease agreement with Gujarat Industrial Development Corporation (‘GIDC’) for grant of leasehold rights in an industrial plot (‘demised plot’) for 99 years. GIDC collected an upfront premium, and was also entitled to periodic lease rentals. VEL assigned the leasehold rights in demised plot for the balance period, viz. 52 years, to Bayer Vapi Private Limited (‘BVPL’). VEL issued a tax invoice charging consideration and applicable GST. BVPL approached Authority for Advance Rulings (‘Authority’) to understand its’ entitlement to credit of the GST so paid.
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The Authority noted that BVPL intends to expand the existing manufacturing facility on demised plot to set up a new manufacturing line. Simply put, the lease of demised plot qualifies as ‘service’ received for construction of an immovable property, by BVPL on its own account. Section 17(5)(d) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) restricts ITC on goods and services received by a taxable person for construction of an immovable property on its own account. As a corollary, BVPL was not entitled to ITC of the GST paid on assignment of leasehold rights.
Our Comments:
At the outset, the issue of taxability of leasehold rights is still under question. There is an arguable case that Schedule II of CGST Act does not extend the levy, or provide for taxability of activities not forming supply. Even if it is ultimately held that grant of leasehold rights also has an aspect of service, which qualifies as ‘supply’ exigible to GST; in our view the issue of assignment of leasehold rights is very different from grant of lease or sub-lease. The assignment of leasehold rights merely constitutes ‘transfer’ of a proprietary interest in land. This activity is indeed outside the ambit of ‘service’ and is devoid of any aspect of service.
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The issue herein was not pertaining to taxability, but admissibility of credit of the GST so paid on assignment of leasehold rights. The Authority referred to Section 17(5)(d) of CGST Act to observe that land being used for construction activity, to disallow the ITC. It is important to note that land is not merely used for construction of immovable property. The use of land can ordinarily be divided into three phases: (i) Period during which construction is undertaken on a greenfield project (‘Phase-I’); (ii) Period during which the facilities and land are used for business operations without any ongoing construction activity (‘Phase-II’); and (iii) Period during which the existing facilities are subject to regular repairs (‘Phase-III’).
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The rent or premium charged for lease of land is attributable to the entire period covering all three phases. Say, the lease is for 99 years, the construction will be undertaken for around 3-6 years. The balance 96-94 years will be covered under Phase-II and Phase-III. Evidently, ITC ought to be allowed for period attributable to Phase-II. The activity of repair also qualifies as ‘construction’ in terms of Section 17(5)(d) of CGST Act. In Phase-III, land is used for business operations as well as construction activity, which will present a unique dispute. Needless to state lease of land will predominantly be attributable to business of making taxable supplies.