Contractors Executing Works Contracts During Transition From VAT To GST Regime Can’t Be Saddled With Additional Tax Burdens: High Court Issues Directions

The Karnataka High Court has reaffirmed that contractors executing works contracts during the transition from the Value Added Tax (VAT) regime to the Goods and Services Tax (GST) regime cannot be saddled with additional tax burdens arising solely due to the change in law. The Bench of Justice M.Nagaprasanna disposed of a writ petition filed by a civil contractor seeking reimbursement of GST and VAT amounts from various State authorities and government undertakings. The petition was filed by a partnership firm engaged in civil construction works for multiple State departments and public sector undertakings in Karnataka. The firm had undertaken works under contracts awarded prior to July 1, 2017—the date on which GST was implemented nationwide. At the time of execution of these contracts, taxes were governed by the Karnataka Value Added Tax Act and Service Tax laws. Following the introduction of GST, the petitioner contended that works contracts were reclassified as “deemed services,” resulting in a higher tax incidence. According to the petitioner, although GST was paid to the tax authorities as a statutory obligation, the corresponding amounts were not reimbursed by the government departments that had awarded the contracts. The contractor sought reimbursement of over ₹3.34 crore towards GST and an additional ₹43.34 lakh towards VAT, along with interest and protection from coercive recovery action The central issue before the High Court was whether government departments and public authorities were obligated to reimburse contractors for the differential tax liability arising from the transition from VAT to GST, particularly where contracts were entered into before the GST regime but executed or paid for partly or wholly thereafter. The respondents raised several objections, including the existence of dispute resolution clauses in the contracts and the contention that reimbursement claims should be resolved administratively rather than through writ proceedings. The court while disposing of the petition, noted that the issue was no longer res integra. The Court relied heavily on earlier judgments of coordinate benches, particularly the landmark decision in Chandrashekaraiah & Others v. State of Karnataka (WP No.9721 of 2019), which laid down comprehensive guidelines for dealing with GST-related disputes in pre-GST works contracts. The Court reiterated that the tax component in a works contract is an independent statutory liability and not a profit element for the contractor. Consequently, contractors cannot be compelled to absorb additional tax burdens caused by a change in tax regime. The judgment also referred to clarificatory circulars issued by the Karnataka Finance Department in January 2020 and December 2020, which prescribed a methodology for calculating differential tax liability between the pre-GST and post-GST periods. While the Court did not grant an outright mandamus for payment of the claimed amounts, it issued detailed directions binding on the State and its agencies. The court directed the department to segregate works executed before July 1, 2017, and assess them under the VAT regime. The court stated that the works executed after the introduction of GST must be recalculated by deducting VAT and service tax components and adding applicable GST. Input Tax Credit (ITC) must be factored in wherever applicable. The “tax difference” arising due to the regime change must be computed contract-wise. Where necessary, supplementary agreements may be executed to reflect revised GST-inclusive contract values. Contractors are entitled to reimbursement where the post-GST tax liability exceeds the original tax component embedded in the contract value. The court directed the petitioner to submit comprehensive representations to the concerned departments within four weeks. The departments, in turn, must consider and dispose of such representations within eight weeks Importantly, the Court granted temporary relief to the contractor by directing GST authorities not to initiate coercive or precipitative action for a period of six months. Contractors who had not filed GST returns during the transitional period have also been permitted to file or amend returns without attracting interest or penalties. Case Details Case Title: M/S.N.R. Kulkarni Nrk Construction Company Versus Uoi Case No.: Writ Petition No. 145682 Of 2020 (T-Res) Date: 09/12/2025 Counsel For Petitioner: Shivraj S Balloli Counsel For Respondent: T.Hanumareddy Click Here To Read Order Read More: GST Recovery Against Construction Firm Stayed Citing Non-Functional GSTAT: Chhattisgarh High Court

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