Guidelines for determining discrepancies arising on tax calculation on pre-GST contracts

[CA Bimal Jain]

The Hon’ble Karnataka High Court in SRI CHANDRASHEKARAIAH, M/S. GOVINDE GOWDA AND SONS, M/S. D.K. CONSTRUCTIONS, M/S. SRI AYYAPPA CONSTRUCTIONS, M/S. ANNAPOORNESHWARI CONSTRUCTIONS, M/S. BHOOMIKA BUILDERS, VERSUS THE STATE OF KARNATAKA, THE UNION OF INDIA, THE GOODS AND SERVICES TAX COUNCIL, PRINCIPAL COMMISSIONER OF CENTRAL TAX, COMMISSIONER OF COMMERCIAL TAXES, CAUVERY NEERAVARI NIGAMA LIMITED, AND OTHER  - 2023 (6) TMI 93 - KARNATAKA HIGH COURT issued guidelines for determining discrepancies arising on tax calculation for Pre-GST works Contracts.

Facts:

Sri Chandrashekaraiah (“the Petitioner”) a Class 1 contractor entered into works contract with various State Government agencies. The work contracts were entered into by the Petitioner and the State Government Agencies when the Karnataka Value Added Tax Act (“the KVAT Act”) and Finance Act, 1994 were in force. The Petitioner was registered under the composition scheme of the KVAT Act under which the Petitioner had to pay tax under the KVAT Act @ 4% on the transaction value of the contract while Service Tax was wholly exempted for the Works Contract.

After the introduction of the Goods and Services Tax Laws (“the GST Laws”) on July 1, 2017(“the Impugned Date”), the works contracts were construed as deemed service and the Petitioner was made liable to pay GST @ 18% from July 1, 2017, to August 21, 2017 and thereafter @ 12%.

The Petitioner was made to bear the additional amount of tax as a result of the transition to the GST regime. Aggrieved the Petitioner filed a Writ Petition under Article 226 of the Indian constitution.

Issue:

Whether the State Government agencies liable to honor the differential amount of tax liability arising as a result of the transition to GST?

Held:

The Hon’ble Karnataka High Court in SRI CHANDRASHEKARAIAH, M/S. GOVINDE GOWDA AND SONS, M/S. D.K. CONSTRUCTIONS, M/S. SRI AYYAPPA CONSTRUCTIONS, M/S. ANNAPOORNESHWARI CONSTRUCTIONS, M/S. BHOOMIKA BUILDERS, VERSUS THE STATE OF KARNATAKA, THE UNION OF INDIA, THE GOODS AND SERVICES TAX COUNCIL, PRINCIPAL COMMISSIONER OF CENTRAL TAX, COMMISSIONER OF COMMERCIAL TAXES, CAUVERY NEERAVARI NIGAMA LIMITED, AND OTHER  - 2023 (6) TMI 93 - KARNATAKA HIGH COURT held as under:

• Held that the tax component is an independent component that the Petitioner do not retain as a profit but it is a statutory payment to be made.
• Directed the State Government agencies to honor the differential tax amount arising out of the transition to GST for the contractors whose work was completed prior to GST but whose payment has been pending.
• Directed the Revenue Department to adhere to the guidelines issued as follows:

1.  Calculate the works executed pre-GST (prior to July 1, 2017) under KVAT regime and payments received by the Petitioners.
2.  The payments received by the Petitioners pre GST for such of the works executed before July 1, 2017, are to be assessed under the KVAT tax regime – either under COT or VAT scheme as applicable.
3.  Calculate the balance works to be completed or completed after July 1, 2017, in the original contract. 
4. Derive the rate of materials, KVAT items required or used to complete the balance works.
5.  Deduct the "KVAT" amount from those materials and the service tax, if applicable.
6.  Add the applicable "GST" on those items.
7.  Input Credit on the materials is to be arrived at and be set off as against the output GST, for those assessed under regular VAT.
8. Further, the “tax difference” should be calculated on such balance works executed or to be executed after July 1, 2017 separately.
1.  Based on the result obtained on calculation of the tax difference on the contract value, concerned department/authority has to decide whether agreement needs to be changed or not.
10.  A supplementary agreement may be signed with the Petitioners for the revised GST-inclusive work value for the Balance Work completed or to be completed as determined above and in case the revised GST-inclusive work value for the Balance Work, completed or to be completed after July 1, 2017, is more than the original agreement work value, the Petitioners are to be paid /reimbursed, as the case may be, the differential tax amount by the concerned employer; so also, in case payments for works completed pre-GST are made post GST, the concerned employer has to pay or reimburse, as the case may be, the differential tax amount, to the Petitioners.

• Disposed off the petition of the Petitioner.

(Author can be reached at [email protected])