17 March 2023
A company (100% export unit) X is holding land ( NA) which is excess and intent to sale or lease to subsidiary company. Subsidiary company also 100% export unit . Question is whether excess land sale or lease ? Implication: (1) Lesser: lease charges earned will be text in income tex which is higher than lessee (2) . On lease charges GST will applicable ? If yes lessee can get set off or refund ? (3) Incase of sale : 3.1 Capital gain earned to lesser company income tax will exempt or tax payable ( land purchase 2021) 3.2 Appx stamp duty and registration charges of sale deed is Rs…….. appx 3.2 Lease period is 9 years. 3.3 Lessee company is going to construct building on that land. 4: Any other direct / indirect expenses
10 July 2024
Here's a detailed response addressing the implications of selling or leasing excess land from Company X to its subsidiary, considering various tax and financial aspects:
### 1. Sale vs Lease Decision:
- **Sale**: Company X can opt to sell the excess land to its subsidiary. This would involve transferring ownership of the land to the subsidiary in exchange for consideration (usually money). This results in a one-time capital gain for Company X.
- **Lease**: Alternatively, Company X can lease the land to its subsidiary. This involves allowing the subsidiary to use the land for a specified period (in this case, 9 years) in exchange for lease payments.
### 2. Tax Implications:
#### For Sale: - **Capital Gains Tax**: - Capital gains arising from the sale of land will be taxable in the hands of Company X. - Since the land was purchased in 2021, the capital gain will be calculated as the difference between the sale consideration and the indexed cost of acquisition (adjusted for inflation). - Long-term capital gains tax rate in India is typically 20% (plus applicable surcharge and cess).
#### For Lease: - **Lease Income**: - Lease payments received by Company X from the subsidiary will be considered as income and taxed at the regular income tax rates applicable to the company.
### 3. GST Implications:
#### For Lease: - **GST on Lease Payments**: - Lease of land is considered a supply of service under GST laws. - GST at the rate of 18% is applicable on lease rentals received. - The subsidiary (lessee) can avail input tax credit (ITC) of the GST paid on lease rentals if it is a registered entity and uses the land for taxable supplies.
### 4. Other Financial Considerations:
- **Stamp Duty and Registration Charges**: - In case of a sale deed, stamp duty and registration charges will apply based on the prevailing rates in the state where the land is located. These charges are typically borne by the buyer (subsidiary).
- **Lease Period**: - The lease period of 9 years implies a steady stream of income for Company X over this duration, subject to lease terms and conditions.
- **Construction by Lessee**: - If the subsidiary plans to construct a building on the leased land, this may have additional implications such as property tax on the constructed building, compliance with local building regulations, and potential income tax implications for depreciation of the constructed asset.
### Conclusion:
- **Sale vs Lease**: The decision between sale and lease depends on factors such as immediate cash flow needs, long-term revenue considerations, tax implications (capital gains vs regular income tax), and strategic objectives of both companies involved.
- **Tax and GST**: Both options (sale and lease) have specific tax implications that need careful consideration. Consultation with a tax advisor or chartered accountant is recommended to optimize the financial outcome and ensure compliance with tax laws and regulations.
- **Legal and Financial Advice**: Given the complexities involved, including GST implications, stamp duty, and potential legal nuances, seeking professional advice tailored to your specific circumstances and jurisdiction is crucial for making an informed decision and executing the transaction smoothly.
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