# CBIC Clarifications on Specific Supplies

## 1. Taxability of Tenancy Rights ('Pagadi' System)

### Background

Tenancy rights are transferred via tenancy premium ('pagadi'):

Tenant pays premium to landlord for occupancy rights and pays periodic rent.
Tenant can sell tenancy rights (sharing proceeds with landlord).
Landlord may also pay outgoing tenant a premium to vacate.

### GST Position

Transfer of tenancy rights is supply of service liable to GST.
It qualifies as lease/renting — a service under Para 2 of Schedule II.
Payment of stamp duty / registration charges does NOT exclude GST liability.
Such transfers do NOT qualify as 'sale of land or building' under Schedule III.

### Exemption [Entry 12 of Notification 12/2017-CT(R)]

Renting of residential dwelling for residence is exempt when given to:

An unregistered person, OR
A registered sole proprietor using it in personal capacity.

Grant of tenancy rights in such residential dwellings is exempt, even where consideration is by tenancy premium, periodic rent or both.

### Outgoing Tenant

When the outgoing tenant surrenders tenancy rights for a share in the tenancy premium → Liable to GST.

## 2. Para 5(e) of Schedule II – 'Agreeing to Refrain / Tolerate / Do an Act'

### Three Limbs

Limb	Examples
(i) Agreeing to refrain from an act	Non-compete agreements; agreeing to limit construction height; halting production temporarily
(ii) Agreeing to tolerate an act or situation	Allowing hawkers on pavement for compensation; tolerating loudspeakers
(iii) Agreeing to do an act	Installing zero-emission equipment without legal obligation, on payment

### Two Conditions for Para 5(e) to Apply

1. Express or implied agreement/contract must exist — one party must be under a contractual obligation to refrain/tolerate/do.

Can be standalone or part of another contract.
Mere flow of money does NOT create a presumed contract.

2. Consideration must flow in return for the refraining/tolerating/doing.

If either condition is missing → Para 5(e) does NOT apply, and no GST under this entry.

Worked example

### Example 1

Pagadi – Commercial: A tenant transfers his shop tenancy rights for a premium of ₹20 lakh. Taxable as supply of service.

### Example 2

Pagadi – Residential to unregistered person: Tenancy in a residential flat granted to an unregistered individual for residence (premium of ₹5 lakh + ₹10,000 monthly rent) → Exempt under Entry 12 of Notification 12/2017-CT(R).

### Example 3

Non-compete fee: Mr. A receives ₹10 lakh for agreeing not to set up a competing factory in Mumbai for 3 years. Both conditions (contract + consideration) satisfied → Supply of services under Para 5(e).

### Example 4

Damages without contract: A buyer pays compensation for breach of an oral promise where no enforceable contract existed. Since no contract is present, Para 5(e) does NOT apply.

⚠️ Common exam mistakes

Treating pagadi transfers as sale of immovable property — they are supply of services.
Assuming every payment of damages/compensation triggers Para 5(e) — without a contract AND consideration flowing for the obligation, it does not apply.
Forgetting that the residential dwelling exemption only applies to specified recipients (unregistered persons or sole proprietors using in personal capacity).
Missing that the outgoing tenant's surrender for a share of premium is itself taxable.

Bare-Act text Schedule II, Para 5(e); Entry 12 of Notification 12/2017-CT(R) · CGST Act, 2017 / Notification No. 12/2017-CT(R) · click to expand

Schedule II, Para 5(e) – Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act, shall be treated as a supply of services.

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Clarifications: Tenancy Rights & Para 5(e) of Schedule II

Worked example

⚠️ Common exam mistakes