AAAR Confirms No ITC on GST Paid for Long‑Term Industrial Land Lease: Rules Credit Blocked u/s 17(5)(d) CGST [Read Order]

In a recent ruling, the Gujarat Appellate Authority for Advance Ruling (GAAAR) has dismissed an appeal, reaffirming that Input Tax Credit (ITC) on Goods and Services Tax(GST) paid for annual lease rentals of industrial land allotted by the Government of Gujarat is not admissible under Section 17(5)(d) of the Central Goods and Services Tax Act, 2017.

The applicant, Agratas Energy Storage Solutions Pvt. Ltd had entered into a 50‑year lease agreement with the state government for approximately 321 acres of land. Under the agreement, Agratas was required to pay annual lease rent at 6 percent of the market value, with a 10 percent escalation every five years.

Agratas approached the Gujarat Authority for Advance Ruling (GAAR) seeking clarity on whether ITC could be claimed on GST paid under the Reverse Charge Mechanism (RCM) for lease rentals—both before and after construction of its factory, and for vacant or green‑belt portions of the land.

The GAAR, in its order dated 03 November 2025, held that ITC was blocked under Section 17(5)(d), which prohibits credit on goods or services used for the construction of immovable property. The authority reasoned that the leased land was specifically meant for industrial construction and therefore fell within the restriction.

Aggrieved, the applicant filed an appeal under Section 100 of the CGST Act, arguing that the lease was not “for construction” but for industrial use, and that the term should be interpreted narrowly—covering only materials directly used in construction, not land‑related services.

The company relied on Supreme Court precedents, including CCE v. TELCO (2003), and contended that denying ITC on annual lease payments while exempting upfront premiums under Notification No. 12/2017‑CT (Rate) created an inequitable distinction.

After hearing the matter, the Appellate Authority, comprising Arti Kanwar (SGST)and Sunil Kumar Mall (CGST), upheld the GAAR’s findings. It observed that both upfront premiums and annual lease rentals are distinct in nature, the former being a capital payment, the latter a revenue expense, and that the legislature consciously chose to exempt only upfront premiums. The bench also noted that the land was leased for the construction of a factory, making the GST paid on such lease rentals ineligible for ITC.

The authority also rejected the argument that ITC should be allowed for vacant or green‑belt areas, holding that these portions form part of the industrial project and are therefore covered by the same restriction.

Accordingly, the appeal was dismissed

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