As per the current regulations, 18% GST is levied on any long term lease transactions, and industry trackers said the GST paid becomes pure cost as it cannot be used as input tax credit in case the recipient wishes to construct any commercial building there.
The companies filed a writ petition in the Rajasthan High Court demanding that either GST be removed from such transactions or they be allowed to claim credit.
As of now, GST is levied on 99-year land lease and that becomes a cost as it cannot be set off if a hotel or any other commercial property is built on it. Most of such land is government-owned and leased to build hotels or ports.
“For various long term lease agreements, the recipient has to bear the brunt of 18% GST, which becomes a cost due to the provisions of blocked credits. We have challenged the inadmissibility of credits, especially when the output supply is taxable – for instance hotel or any other commercial property” said Abhishek A Rastogi, partner at Khaitan & Co.
As per the GST framework, to avail input tax credit, companies have to prove that taxes paid on raw material or any other input was used towards making the final product. Input tax credit is a mechanism where part of the taxes paid on raw materials can be set off against future tax liabilities.
The question in this case is, whether the land leased from the government is an input for the recipient if the company is building a hotel or a port there? Some companies claim that if a hotel is built on that land, then the leasing should be considered as input.
“The objective of GST is seamless credit and removal of tax cascading effect. These writs are in that direction,” said Rastogi.