The Karnataka High Court has held that courts cannot direct the GST department to permit revised returns, waive statutory interest, penalties, or limitation periods merely because disputes exist regarding reimbursement of GST arising from pre-GST works contracts.
The bench of Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha set aside the Single Judge’s directions granting such relief to a contractor, reaffirming that GST liabilities are governed strictly by statute.
The respondent/assessee is a subcontractor, was engaged in executing works relating to the Basaveshwar (Kempwad) Lift Irrigation Scheme in Karnataka. The principal contract had been awarded before the introduction of the Goods and Services Tax (GST) regime on July 1, 2017, while the subcontract was executed around the time GST came into force.
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The company contended that the contract rates had been determined under the earlier VAT regime and did not factor in the additional GST liability that became applicable after July 1, 2017. Consequently, it claimed that the enhanced tax burden should ultimately be borne by the employer through reimbursement.
Meanwhile, the subcontractor filed GST returns for the financial years 2017-18, 2018-19, and 2019-20 belatedly. The GST authorities issued notices demanding interest under Section 50 of the Central Goods and Services Tax (CGST) Act for delayed payment of self-assessed tax and later initiated recovery proceedings through a bank attachment notice issued under Section 79(1)(c) of the Act.
The matter had earlier been decided as part of a batch of petitions involving similar works contract disputes.
The Single Judge directed government departments and employers to recalculate the value of works executed before and after the GST regime, determine the differential tax liability, execute supplementary agreements where necessary, reimburse contractors for additional GST costs, permit filing of GST returns or revised returns without insisting on interest or penalties, and restrain GST authorities from taking coercive action for six months.
The Central GST department challenged only those portions of the order that affected tax administration.
The department argued that the Single Judge had effectively overridden the statutory framework by directing GST authorities to accept revised returns beyond the prescribed provisions, waive mandatory interest and penalties, relax statutory limitation periods, and suspend recovery proceedings despite the absence of any enabling provision under the GST laws.
Allowing the appeal, the Division Bench held that contractual disputes regarding reimbursement of additional GST cannot alter statutory tax obligations under the GST Acts.
The Court observed that whether a contractor is entitled to recover the increased tax burden from the employer is purely a matter between the contracting parties. Such contractual arrangements do not affect the statutory liability to pay GST, interest, or penalties in accordance with the provisions of the GST legislation.
The Bench further emphasized that liability to pay interest for delayed payment of tax arises automatically by operation of law. Unless the statute specifically provides otherwise, neither tax authorities nor courts can waive or reduce such interest.
Referring to the Supreme Court’s decision in Pratibha Processors v. Union of India, the Court reiterated that statutory interest is mandatory where the fiscal legislation provides for it and leaves no discretion to authorities for waiver.
The Court held that the directions permitting filing or amendment of GST returns in a manner not contemplated under the GST Acts were legally unsustainable.
Similarly, blanket directions waiving statutory interest, penalties, and limitation periods or restraining GST authorities from initiating recovery proceedings could not be sustained because they directly conflicted with the legislative framework governing assessment and collection of tax.
While setting aside the directions issued against the GST authorities, the Court clarified that disputes concerning reimbursement of the additional GST burden remain enforceable between the contracting parties.
Accordingly, any direction regarding reimbursement of GST should be understood as operating only against the contractual employer and not against the tax authorities responsible for administering the GST law.
The Karnataka High Court allowed the writ appeal and set aside the Single Judge’s order insofar as it related to Sadguru Infratech Pvt. Ltd. The Court ruled that GST authorities cannot be compelled to accept revised returns beyond the statutory scheme, waive mandatory interest or penalties, relax limitation periods, or refrain from enforcing tax recovery merely because the underlying contractual dispute regarding GST reimbursement remains unresolved.
