2023 GST Recap: MSMEs Await Final Word On Leasehold Rights
Here's why the Goods and Services taxability on leased land could lead to a high tax bill for MSMEs across the country.
In February, a pan-india MSME industry body—the Chamber of Small Industries Association appealed to the state and central government that ongoing investigations and summons by the Goods and Services Tax department regarding liability on leased land was of concern to the businesses of Maharashtra.
The issue is whether tax liability owed to the department on the transfer of leased land from one party—in this case, an MSME transfering lease ownership of state land parcels—to other parties can be termed as a 'supply of service' and attract 18% tax.
A similar case in Gujarat progressed to the high court in October. The Gujarat High Court halted the proceedings regarding the levy of GST on the transfer of leasehold rights of land from the Gujarat Industrial Development Corp. to private parties.
In the last of our three-part series on the significant legal developments in GST in 2023, we count down what corporates need to be mindful of in 2024. NDTV Profit reached out to lawyers and corporate advisors to understand why the Goods and Services taxability on leased land could lead to a high tax bill for MSMEs across the country.
According to Rajat Bose, indirect tax partner at Shardul Amarchand and Mangaldas, the subject of leasehold rights was reignited this year on the back of summons and notices issued.
"The department has contended that the transfer of leasehold right is a 'service of tenancy', and the position of the companies is that this is a sale of immovable property. Leasehold right was always treated as part of the larger sale of immovable property and income tax law precedents also treat it so," he said.
The concern has now compounded across industries, Bose said, as there are many transactions done by companies who are either selling their factories or doing a slump sale.
"Their position before (prior to the summons) was that it would not incur GST or service tax; however, the receipt of notices for significant amounts has caused much concern," he said, adding that early estimates across the board cumulatively run into Rs 15,000-20,000 crore.
The summons in many cases have also implied the reopening of already settled accounts between parties, years after the transaction, causing uncertainty for both the MSMEs and the other party as both might have already invested the proceeds from the lease transfer.
Evolving Legislation
As the matter awaits clarity, companies are looking at treating it as a contingent liability, said Bose. This highlights a revelant concern for companies that will have to acquire adequate future indemnities in merger and acquisition transactions, he said.
"...entities looking at getting into future transactions should be cognisant of these considerations and make provisions/safeguard against them. While they might hold a certain position on the GST payment now, they might receive a notice in the future which suggests the need to take adequate indemnities from the buyer so that if/when notices come from the department, they can deal with it accordingly because the legislation is evolving."
Saloni Roy, a partner at Deloitte India, concured that the legislative landscape is evolving with a nascent law like the Goods and Services Tax.
She prescribes caution and advices companies look at all related-party transactions carefully.
"Taxpayers need to be mindful, especially MNCs when there are free of charge related-party transactions involved. They should take caution and be prepared and go a step further in identifying transactions that could have a tax implication," she told NDTV Profit.
2023 has been a year of healthy GST collections, which have shown both stability and growth.This gives confidence about the economic health and shows more taxpayers are coming into the tax net as are registrations —all of which bode well for the system and its potential, she said.
