Karnataka HC: No GST Deduction Permitted From Compensation in Land Acquisition Cases

1. Background of the Dispute

In Smt Lalitha S Vs Deputy Commissioner (Karnataka High Court), the Karnataka High Court examined whether Goods and Services Tax (GST) could lawfully be deducted from compensation awarded for compulsory acquisition of land, including structures standing on it.

The petitioner, Smt. Lalitha S, was the owner of land measuring 10.08 guntas in Sy.No.219/2 of B. Agrahara Village, Belagola Hobli, Srirangapatna Taluk, Mandya District. This land, with appurtenant structures, was acquired by the Union of India for the purpose of road widening of the Mysuru – Madikeri Highway, for the benefit of respondent No.3.

An award was passed determining the total compensation at Rs.8,89,035.20. From this amount, respondent No.2 deducted Rs.1,14,815.29, purportedly towards 18% GST.

Aggrieved by this deduction, the petitioner invoked the writ jurisdiction of the Karnataka High Court seeking:

  • A writ of mandamus directing respondent Nos.2 to 4 to refund Rs.1,14,815.29 deducted as GST from the compensation, and
  • Interest on this deducted amount from the date of award till payment.

The core legal question before the Court was whether the compulsory acquisition of land (together with structures) and payment of compensation could be treated as a “supply” of goods or services so as to attract GST.

2. Petitioner’s Contentions

2.1 Nature of Acquisition and Inapplicability of GST

Counsel for the petitioner argued that:

  • The acquisition was carried out under statutory powers of eminent domain;
  • The petitioner did not enter into any consensual transaction of sale, nor did she provide any service;
  • Consequently, the transaction did not fall within the ambit of “supply of goods or services” under the Central Goods and Services Tax Act, 2017 (GST Act).

It was asserted that compulsory surrender of land and structures in favour of the State is an act of expropriation and not a business transaction.

2.2 Reference to Income Tax and Exemption for Agricultural Land

The petitioner also contended:

  • That when agricultural land is acquired and compensation is paid, the Income Tax Act, 1961 does not apply to such compensation;
  • Reliance was placed on the decision in W.P.No.35685/2025 and connected cases, where the High Court had held that TDS could not be deducted from compensation amounts payable to landlosers.

2.3 Characterisation of Deduction as Arbitrary

On this basis, the petitioner submitted that:

  • Deduction of GST from the compensation amount was arbitrary and beyond legal authority;
  • It amounted to a colourable exercise of power, because the respondents could not point to any statutory provision permitting levy of GST in such circumstances.

Accordingly, the petitioner sought quashing of the deduction and a direction for refund with interest.

3. Respondents’ Stand

Counsel appearing for respondent Nos.2 to 4 defended the deduction by relying on the following points:

3.1 Works Contract / Structural Component Argument

The respondents contended that:

  • The GST Act mandates levy of GST on works contract services and structure valuation;
  • This principle, according to them, had been applied uniformly to all landlosers whose land and structures were acquired;
  • While they appeared to accept that pure land compensation might not attract GST, they asserted that the structural component of the award was liable to GST.

3.2 Interpretation of Land Acquisition Compensation

The respondents further argued that:

  • The petitioner’s reliance on tax exemption for compensation under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 was misplaced;
  • According to them, exemption under that statute did not extend to all components in the manner claimed by the petitioner;
  • Specifically, they suggested that structures built on land and valued under the award could be treated differently from bare land for GST purposes.