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2023 (6) TMI 93 - HC - GSTApplicability of GST Act - works contract commenced prior to 01.07.2017 and completed partially before 1.7.2017 or payment received partially before 1.7.2017 - Scope of the contract - inclusive of tax / exclusive of tax - jurisdiction of respondent Nos 4 to 8 to either issue notice or to take any coercive steps against the Petitioners under the provisions of the GST Act dated 01.07.2017 - constitutional validity of provisions of Section 7 (3) read with clause 6 of Schedule II of the GST Act - vires of Article 366 (12A), (26A) (29A) (b) (f) the Constitution in view of and settled principles of law laid down by the Hon ble Supreme Court regarding works contract. HELD THAT - It is an undisputed fact that the Petitioners herein are class-I contractors who have entered into works contract with various State Govt agencies and that the agreements were entered into at a point of time when the KVAT Act and Finance Act 1994 were in force. It is also not in dispute that the Petitioners are either covered under Composition scheme or regular VAT assessment and that on 01.07.2017 when the GST Act was implemented pan India, the said works contract was treated as deemed service and the Petitioners became liable to pay GST. It is this differential tax amount arising out of change in tax regime from VAT to GST which cast an additional tax burden on the Petitioners, which is the subject matter of the present petitions. There are considerable force in the submission made by the learned Senior counsel for the petitioners that the tax component is an independent component which the petitioners do not retain as a profit and is a statutory payment to be made; that looking into the nature of such payment of GST, the respondents/employers are required to honour the same after determining the differential tax burden, especially for the Petitioners who are before this court where works contract were entered prior to 01.07.2017 during KVAT regime and works are completed pre-GST but payments are made post-GST or Contracts entered prior to 01.07.2017 but partly executed pre-GST and balance work executed post-GST or Contracts for which tenders were invited during KVAT regime and finalised after 01.07.2017 under GST regime or contracts which were invited during KVAT regime under old schedule of rates (SR) but finalised under GST regime and that a certain procedure is required to be followed to determine the amount payable by or to the works contractors/Petitioners. Revenue authorities directed to determine the amount of VAT payable for the period prior to 1.7.2017 and GST payable for the subsequent period as per relevant VAT / GST law Petition disposed off with directions.
Issues Involved:
1. Applicability of GST on works contracts executed prior to 01.07.2017. 2. Jurisdiction of respondents to issue notices or take coercive steps under GST Act. 3. Consideration of representations by the respondents regarding differential tax burden under GST. Summary: Issue 1: Applicability of GST on works contracts executed prior to 01.07.2017 The petitioners, class-I contractors, contended that they entered into works contracts with various State Government agencies under the Karnataka Value Added Tax Act (KVAT Act) and Finance Act 1994, prior to the implementation of GST on 01.07.2017. They were assessed under either the Composition scheme (COT scheme) or regular VAT assessment. With the introduction of GST, these works contracts were treated as "deemed service," and the petitioners became liable to pay GST at 18% from 01.07.2017 to 21.08.2017 and at 12% thereafter. The differential tax burden due to the transition from VAT to GST imposed a significant financial burden on the petitioners. Issue 2: Jurisdiction of respondents to issue notices or take coercive steps under GST Act The petitioners sought a declaration that the GST Act provisions are inapplicable to works contracts where services were provided prior to 01.07.2017. They argued that the respondents (Nos. 4 to 8) lacked jurisdiction to issue notices or take coercive steps under the GST Act for such contracts. The respondents contended that for works contracts executed prior to 01.07.2017, the GST Act is inapplicable, and only the portion of the work executed after 01.07.2017 would be taxed under GST. They maintained that the onus was on the petitioners to declare and pay taxes accordingly under both regimes. Issue 3: Consideration of representations by the respondents regarding differential tax burden under GST The petitioners argued that the differential tax burden should be absorbed by the respondents, similar to practices adopted by other states and central government departments. They cited instances where other states and departments absorbed the additional tax burden to ensure contractors were not financially disadvantaged. The petitioners requested the court to direct the respondents to consider their representations and absorb the differential tax burden. Judgment: The court acknowledged the significant financial burden imposed on the petitioners due to the transition from VAT to GST. It referred to State Government Circulars dated 03.01.2020 and 14.12.2020, which provided guidelines for calculating taxes for pre-GST and post-GST periods. The court also considered similar judgments from other High Courts, which supported the petitioners' contentions. The court issued the following directions: 1. Calculate works executed pre-GST and payments received under the KVAT regime. 2. Assess payments received pre-GST under the KVAT regime. 3. Calculate balance works completed post-GST and derive the rate of materials. 4. Deduct KVAT amount from materials and add applicable GST. 5. Determine input credit on materials and set off against output GST. 6. Calculate the tax difference for balance works executed post-GST. 7. Decide whether the agreement needs to be changed based on the tax difference. 8. Sign supplementary agreements for revised GST-inclusive work value and reimburse differential tax amounts. 9. Petitioners to submit comprehensive representations within 4 weeks. 10. Respondents to consider and dispose of representations within 8 weeks. 11. Petitioners allowed to file GST returns without interest or penalty. 12. GST authorities directed not to take precipitative action for 6 months. 13. Liberty reserved for petitioners to challenge any subsequent decisions. The petitions were disposed of with these directions to ensure fair and just treatment of the petitioners concerning the differential tax burden under GST.
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