Delhi HC Stays GST on Leasehold-to-Freehold Conversion, Questioning if it’s a Taxable Supply.

Issue

Whether the charges collected by the Delhi Development Authority (DDA) for converting a property from leasehold to freehold constitute a taxable “supply of service” under the CGST Act, or if they are part of a non-taxable sale of immovable property.

Facts

• The petitioners challenged the DDA’s levy of GST (amounting to ₹30.26 lakhs) on the charges paid for converting their leasehold property to freehold.
• DDA’s Argument: The DDA justified the tax by claiming the conversion is a taxable service under Para 5(e) of Schedule II (“agreeing to the obligation to refrain from an act”). They argued that by converting the property, they are “foregoing the right to receive future rent,” which they classify as a service.
• Petitioners’ Argument: The petitioners contended that the conversion is not a separate service but is merely the final step in the process of selling immovable property, which is explicitly excluded from GST under Schedule III (Entry 5) of the Act. They relied on a Supreme Court ruling in Charanjit Kaur to support this.
• The court also noted that DDA’s own conversion schemes published after the implementation of GST (in 2016 and 2023) made no mention of any applicable GST.

Decision

• The Delhi High Court took a prima facie view in favour of the petitioners, observing that the conversion appears to be part of the sale of immovable property and thus not liable to GST.
• The court granted interim protection to the petitioners, restraining the DDA from taking any coercive action to recover the disputed GST amount.
• The DDA and the GST Department were directed to file short affidavits explaining the legal and policy basis for this levy. The matter remains sub judice (under judicial scrutiny).

Key Takeaways

• Taxability of Conversion is Debatable: The fundamental nature of a leasehold-to-freehold conversion under GST is now under judicial scrutiny.
• “Service” vs. “Sale of Immovable Property”: The case hinges on whether the conversion is a separate service (taxable) or the culmination of a property sale (non-taxable). The High Court’s initial view leans toward the latter.
• Interim Relief Granted: The stay provides immediate relief to the property owners, preventing the DDA from forcing the payment of GST on such conversions until the court delivers a final judgment.
• DDA’s “Refraining from an Act” Argument: The DDA’s novel argument that forgoing future rent is a taxable service is a key point of law that the court will examine.