The Karnataka High Court has clarified that disputes regarding reimbursement of additional GST burden arising after the introduction of the GST regime are contractual matters between contractors and their employers, and cannot result in directions against tax authorities for waiver of statutory obligations. 

The bench of Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha partially allowed the State’s appeal against an earlier order directing reimbursement of GST amounts to contractors. 

The contractors had approached the High Court seeking reimbursement of the differential GST paid on works contracts executed for various government departments. They contended that many of the contracts had been tendered or entered into under the erstwhile Karnataka Value Added Tax (KVAT) regime, prior to the rollout of GST on July 1, 2017. 

According to the contractors, the contracts fell into three categories.

Firstly, contracts where tenders and agreements were executed before July 1, 2017 under the VAT regime.

Secondly, contracts where tenders were invited before July 1, 2017 but agreements were executed after GST came into force.

Thirdly, contracts entered into after July 1, 2017 but based on pre-GST Schedule of Rates. 

The contractors argued that the quoted rates were based on pre-GST schedules and therefore did not factor in GST liabilities under the CGST, SGST and IGST laws. As a result, they claimed that they had to bear an additional tax burden and sought reimbursement of GST at rates of 12% and 18% from the concerned government departments. 

A Single Judge had allowed the writ petition by relying on the earlier Karnataka High Court decision in Sri Chandrashekaraiah v. State of Karnataka. The court directed the concerned respondents to reimburse the GST amounts claimed by the contractors within six weeks. 

The earlier Sri Chandrashekaraiah judgment had laid down a mechanism for calculating the differential tax burden arising due to the transition from the VAT regime to GST. It contemplated reassessment of the tax component in contracts, execution of supplementary agreements, and reimbursement of the differential GST amount where the revised GST-inclusive contract value exceeded the original contract value. 

The State challenged the order primarily on two grounds.

First, it argued that the Single Judge’s order indirectly incorporated directions from the Sri Chandrashekaraiah case that permitted filing of revised GST returns and effectively waived interest, penalty and limitation requirements under GST laws. Second, it contended that the State itself was not liable to reimburse contractors and any such obligation, if at all, would rest only upon the respective employer department that had entered into the contract. 

The Bench accepted the State’s contention that GST liability is governed entirely by statute and cannot be altered by contractual arrangements between contractors and employers. 

The Court emphasized that questions relating to levy, assessment, recovery and enforcement of GST must be determined strictly in accordance with the GST enactments. 

The Bench held that no judicial directions could be issued permitting filing of revised returns contrary to statutory provisions or granting blanket waivers of interest, penalties and limitation periods prescribed under GST laws. Such directions were found to be legally unsustainable. 

The Court further observed that the real dispute was limited to whether the employers were contractually bound to reimburse the contractors for the incremental GST burden. In that context, directions affecting the powers of GST authorities concerning tax collection, assessment, penalty or interest could not be justified. 

While preserving the contractors’ right to seek reimbursement from the concerned employer departments, the Division Bench clarified that any direction for reimbursement must be construed only against the employer concerned and not against GST authorities or the State in its capacity as tax administrator. 

Consequently, the Court set aside the portions of the earlier order that could be interpreted as imposing obligations on tax authorities or granting relief against statutory GST requirements.

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