Karnataka High Court Rules Out GST Deduction on Compensation for Compulsory Land Acquisition

Background of the Dispute

The Karnataka High Court in Smt. P. S. Shamala Vs Deputy Commissioner examined whether Goods and Services Tax (GST) could legally be deducted from compensation awarded for compulsory acquisition of land, including structures, for a national highway project.

The assessee’s land measuring 6.5 guntas in Sy. No.21/44 of Basavanahalli Village, Kushalnagar Taluk, Kodagu District, was acquired by the Union of India for widening the Mysuru–Madikeri Highway. An award was passed determining compensation at ₹1,21,33,938. While disbursing this amount, respondent No.2 (acquiring authority) deducted ₹18,39,252, treating it as 18% GST.

The assessee challenged:

  • The deduction of GST from the compensation amount, and
  • The failure to treat the entire acquisition process as outside the scope of the Central Goods and Services Tax Act, 2017.

The writ petition sought a mandamus directing refund of the deducted GST along with interest from the date of the award, and appropriate costs.

Assessee’s Core Contentions

Nature of Land Acquisition and Inapplicability of GST

The assessee argued that compulsory acquisition:

  • Is not a voluntary transaction,
  • Does not constitute a “sale of goods” or “supply of services”, and
  • Is an exercise of statutory power (eminent domain) by the State.

On this basis, the assessee contended that the Central Goods and Services Tax Act, 2017 (“GST Act”) has no application to compensation paid in such acquisition proceedings.

Reliance on Earlier Judicial Precedent

The assessee’s counsel pointed out:

  • In earlier matters, including W.P.No.35685/2025 and connected cases, the Karnataka High Court had held that no TDS could be deducted from compensation paid on acquisition of agricultural land.
  • By analogy, if income tax deduction at source is impermissible on such compensation, the deduction of GST, which presupposes a supply of goods or services, is even more clearly unsustainable.

The overall submission was that the GST deduction was arbitrary and amounted to a colourable exercise of power by the acquiring authority.

Respondents’ Stand

Justification for GST Deduction

Respondent Nos.3 and 4, in their statement of objections (adopted in this writ petition from W.P.No.26239/2025), asserted that:

  • The GST Act mandates levy of GST on works contracts and on the value of structures.
  • The deduction was carried out uniformly in respect of all landlosers affected by the project.

They argued that:

  • While the land component of compensation may not attract GST,
  • The portion of the award relatable to the structural component (buildings, constructions, etc.) is exigible to GST as per law.

Therefore, according to the respondents, the assessee’s reliance on the exemption of land acquisition compensation was misplaced and did not reflect the comprehensive statutory scheme.

Issues Before the Court

The High Court had to determine:

  1. Whether compulsory acquisition of land and structures can be treated as a “supply of goods or services” under the GST Act.
  2. Whether GST could be lawfully deducted from the total compensation awarded to the assessee.
  3. Whether the respondents had the authority to treat the acquisition award as attracting GST on any component, including structures.

Definition of Immovable Property