GST cannot be deducted from compulsory land acquisition compensation, Karnataka High Court rules, ordering refund with 15% interest

The petitioner’s 250 sq. m. site in Basavanahalli Village was acquired for widening the Mysuru–Madikeri Highway.

Compensation was determined at ₹18,57,690, from which the Special Land Acquisition Officer deducted ₹2,83,376.44 as 18% GST.

The petitioner sought reimbursement of the deduction with interest, contending that compulsory acquisition was neither a sale of goods nor a supply of services.

The respondents maintained that GST applied to the structural component of the award.

1. Whether GST could be deducted from compensation paid for the compulsory acquisition of the petitioner’s land and structure

2. Whether the petitioner was entitled to interest and costs in addition to reimbursement of the deducted amount

Article 366(12A) of the Constitution concerns tax on the supply of goods or services.

Section 3 of the Transfer of Property Act, 1882 treats things attached to or embedded in land for its beneficial enjoyment as part of immovable property.

The Court reasoned that compulsory acquisition by the State is an exercise of eminent domain, not a supply of goods or services; accordingly, GST could not be deducted from the acquisition compensation absent a statutory basis for treating the acquisition as a taxable supply.

The Court also referred to a Madras High Court decision concerning GST on acquisition compensation and to its own prior reasoning that interest forming part of land-acquisition compensation was not subject to tax deduction at source.

The acquisition and the GST deduction were undisputed.

Applying the distinction between immovable property and a taxable supply, the Court held that the petitioner had neither sold goods nor provided a service by surrendering her property through compulsory acquisition.

Although the respondents asserted that the structural component was taxable, they did not identify a provision of the GST Act under which acquisition of land or a structure constituted a supply.

The deduction therefore exceeded the respondents’ authority.

The Court ordered interest on the deducted sum and costs.

It quashed the award notice insofar as it provided for that deduction and directed the second respondent to refund ₹2,83,376.44 with interest at 15% per annum from the date of the award until payment.

The interest was to be recovered personally from the second respondent, who was also directed to pay ₹50,000 in costs within one month; the petition was disposed of accordingly.