Leasing Agricultural Land Under GST: “Actual Use” Tests and 18% Risk Triggers

Goods andServices Tax (GST) is a comprehensive, multi-stage, destination-based indirect tax levied on the supply of goods and services in India. It replaced a complex web of central and state taxes with a unified "One Nation, One Tax" system aimed at reducing the cascading effect of taxation across the supply chain.

However, Schedule III of the CGST Act explicitly excludes the "sale of land" and "sale of buildings" from the ambit of GST, creating the central legal debate over whether long-term lease assignments should be treated as taxable services or non-taxable property transfers.

Leasing is a contractual agreement in which one party, the lessor (owner), allows another party, the lessee (user), to use an asset—such as property, vehicles, machinery, or equipment—for a specified period in exchange for regular payments. At the end of the lease term, the lessee typically returns the asset to the lessor, though some agreements include an option to purchase the asset or renew the contract.

Agricultural land is typically land devoted to agriculture, the systematic and controlled use of other forms of life—particularly the rearing of livestock and production of crops—to produce food for humans. This land serves as the foundational resource for global food security and often requires specialized management to maintain soil fertility and ecosystem balance.

Case Laws

Recent decisions, such as the Gujarat Chamber of Commerce and Industry & Ors. v. Union of India & Ors. (2025) ruling, highlight that the actual activity carried out on the land, rather than the designation on the Title Deed, determines whether a lease is taxable. This "substance over form" approach ensures that if land designated as agricultural is actually used for commercial or industrial purposes, it loses its tax-exempt status and becomes subject to applicable GST or service taxes.

Quite recently, the Bombay High Court has quashed an order demanding GST on assignment of leasehold rights and remitted the matter for fresh reconsideration by taking account of the Gujarat High Court’s decision in M/s Panacea Biotec Ltd. v. Union of India (2024). By remitting the matter, the Court acknowledges that a permanent assignment of leasehold rights may be legally distinct from a temporary "service" of renting, potentially classifying it as a "sale of land" under Schedule III of the CGST Act, which is non-taxable.

‘Actual Use’ Tests and 18% Risk Triggers

Notification No. 12/2017-CT (Rate) was a Central Goods and Services Tax (CGST) notification notified on 28 June 2017, issued by the Government of India under the Central Goods and Services Tax Act, 2017. It provides a comprehensive list of services that are exempt from CGST, most notably Entry No. 54, which exempts services relating to the cultivation of plants and rearing of all life forms of animals (except horses) for food, fiber, or fuel.

Therefore, leasing of agricultural land enjoys a GST exemption, but only when the land is actually used for agricultural purposes. Entry 54 of Notification No. 12/2017-CT (Rate) exempts services relating to cultivation, including renting or leasing of agricultural land. Thus, when land is leased for farming, nurseries, floriculture, sericulture, or animal rearing, no GST is payable.

However, if the land is leased for non-agricultural, commercial or industrial activities, the exemption does not apply. Even land classified as "agricultural" in records becomes taxable at 18% if used for warehouses, factories, coaching classes, construction, or other commercial purposes. 18% GST is a standard tax rate applied in India under the Goods and Services Tax (GST) system on a wide range of goods and services. Several AAR rulings have emphasised that actual use, not land classification, decides GST liability.

A "substance over form" check is provided by the "Actual Use" doctrine. The exemption under Entry 54 disappears if a landowner leases "agricultural land" to a corporation that uses the land to store building materials or park its fleet of logistics trucks.

Ultimately, the taxability of agricultural leases hinges on actual utility rather than formal titles. While Entry 54 offers a vital shield for genuine cultivation, the 2025-2026 judicial shift toward "substance over form" means any commercial pivot triggers an 18% GST risk.

Landowners and lessees must align their contracts with physical operations to navigate this evolving landscape, where the boundary between a "service" and "sale of land" remains a high-stakes legal frontier.

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