Conversion of Leasehold to Freehold Property Does Not Attract GST Under Section 7 (2) of CGST Act: High Court of Delhi

In a significant interim order that brings relief to property owners, the High Court of Delhi has addressed the controversial levy of Goods and Services Tax (GST) by the Delhi Development Authority (DDA) on the conversion of properties from leasehold to freehold. The bench, comprising Justices Prathiba M. Singh and Shail Jain, directed a stay on coercive steps against petitioners while noting that such conversion appears to be part of the sale of immovable property, which remains outside the ambit of the Central Goods and Service Tax Act, 2017 (CGST Act).

The Dispute: A Taxing Transition

The petitioners, owners of three units in the DLF South Court Mall, Saket, found themselves in a protracted battle with the DDA. After paying substantial conversion fees, processing fees, and interest, they were met with a series of fresh demands. In April 2025, the DDA invoked a newly introduced Standard Operating Procedure (SOP), citing that conversion charges were taxable as a service—specifically, for "foregoing the right to collect future rent." This led to a retrospective demand of over Rs. 30 lakhs in GST.

Arguments from the Bar

Representing the petitioners, Senior Counsel Sandeep Sethi argued that the conversion process is a standard step in the absolute sale of immovable property. Relying on Section 7 (2) of the CGST Act and Schedule III, he maintained that the transaction is exempted from GST. He further drew upon the Supreme Court’s decision in * Estate Officer and Another v. Charanjit Kaur * (2021), which clarified that conversion charges are essentially part of the sale consideration and not fees for professional services.

Conversely, the DDA counsel maintained that under Serial No. 5(e) of Schedule II of the CGST Act, the act of foregoing the right to collect future lease amounts qualifies as a taxable supply of services.

Judicial Analysis: Viewing the Substance of the Transaction

The High Court adopted a prima facie view favoring the petitioners. The Court emphasized that conversion is merely the affirmation of title, transitioning a limited leasehold interest into absolute ownership. The bench observed that the DDA’s own conversion scheme, established in 2016, did not contemplate GST charges, and the recent SOP shift did not alter the fundamental nature of the transaction.

Key Observations

The Court’s reasoning was anchored in the principle that land transfers hold specific exemptions under the GST regime. Key reflections from the judgment include:

• " Section 7 (2) of the CGST Act clearly exempts immovable property from the domain of supply of goods or services."
• "The process of conversion would merely be a part of the process of sale and conversion charges would be nothing more than consideration for sealing the sale in favour of the purchaser."
• "The owner i.e., the Central Government, cannot be said to be a trader or a service provider." (Quoting Estate Officer v. Charanjit Kaur )
• "Conversion is nothing but a part of the process of sale of the immovable property by the DDA to purchasers and GST would not be liable to be charged on such conversion."

Implications and Next Steps

The Court has issued notice to the DDA and the GST Department, mandating that both entities file short affidavits to explain their stance. Crucially, the Court has restrained the DDA from taking any coercive measures to recover the disputed GST amounts until the matter is heard again on December 5, 2025.

For property holders across Delhi, this order provides a critical shield against unexpected tax liabilities on conversion charges, reinforcing the position that transferring property from leasehold to freehold remains fundamentally a sale of land, not a service transaction. Legal experts will be closely watching the December hearing for the final interpretation of the CGST Act in this context.