2023 (6) TMI 93 - HC - GST

GST applies to works contracts partially executed after 01.07.2017 under KVAT regime as deemed services with tax liability split

The HC held that works contracts entered into before 01.07.2017 under the KVAT regime, but executed or paid for partially after GST implementation, ... Works contract - deemed service - GST neutralization / reimbursement of differential tax - calculation of tax difference on balance works - deduction of pre GST tax and addition of post GST tax with Input Tax Credit set off - supplementary agreement for revised GST inclusive work value - procedural direction to consider representations expeditiouslyWorks contract - GST neutralization / reimbursement of differential tax - Whether employers/contracting authorities who awarded works contracts entered into prior to 01.07.2017 are required to determine and make good the differential tax burden arising from the changeover to GST and reimburse or recover the tax difference as appropriate. - HELD THAT: - The Court found that the Petitioners were class I contractors who entered into works contracts during the KVAT regime and became liable to GST after 01.07.2017, producing a differential tax burden. Following the State Circulars of 03.01.2020 and 14.12.2020 and consistent High Court precedents, the tax component was held to be an independent statutory element which contractors do not retain as profit. In the interests of substantial justice, employers/authorities are directed to determine the tax difference on each contract and, after calculating the GST inclusive revised value for the balance work, reimburse or recover the differential tax amount as may result from that calculation. The Court observed that this process may require revision of agreements and supplementary agreements where the GST inclusive work value differs from the original contract value, and that reimbursement or recovery should follow the calculation of differential tax per contract. [Paras 11, 18, 20]Employers/contracting authorities who awarded contracts prior to 01.07.2017 must calculate the tax difference on each contract and reimburse or recover the differential tax by following the procedure and, where necessary, entering into supplementary agreements.Calculation of tax difference on balance works - deduction of pre GST tax and addition of post GST tax with Input Tax Credit set off - What procedure is to be followed to determine the differential tax liability between the pre GST and post GST portions of works contracts? - HELD THAT: - The Court adopted the methodology reflected in the State Circulars and earlier judgments: ascertain works executed prior to 01.07.2017 and payments received under the KVAT regime; calculate balance works executed after 01.07.2017; derive rates of materials and KVAT items for the balance works; deduct the KVAT (and service tax where applicable) component from those materials and add the applicable GST; determine Input Tax Credit on materials and set it off against output GST for those assessed under regular VAT; compute the tax difference contract wise; and decide whether the agreement requires amendment. The Court directed that these steps be applied separately for each contract and that the result guide whether reimbursement or recovery is due. [Paras 12, 14, 20]The procedure set out in the State Circulars-deduct pre GST tax, add applicable GST, and set off eligible ITC-must be applied contract wise to compute the tax difference.Supplementary agreement for revised GST inclusive work value - GST neutralization / reimbursement of differential tax - Whether and how supplementary agreements and adjustments to contract value should be effected once the tax difference is computed. - HELD THAT: - Relying on precedents and the Circulars, the Court held that if the revised GST inclusive work value for the balance work (as computed) is greater than the original agreement work value, the employer shall pay/reimburse the differential amount; conversely, if lower, the payment shall be reduced or excess recovered. The Court authorised entering into a supplementary agreement for the revised GST inclusive work value and indicated that the concerned department/authority must decide on amendment of agreement based on the computed tax difference. [Paras 14, 16, 20]Where computation shows a change in GST inclusive work value, parties may enter a supplementary agreement and the employer shall reimburse or recover the differential amount as determined.Procedural direction to consider representations expeditiously - filing of returns without interest or penalty - Interim procedural protections for petitioners and obligations on authorities regarding representations, filing of returns and coercive action. - HELD THAT: - The Court directed petitioners to submit comprehensive representations to employers within four weeks. Employers/authorities are directed to consider and dispose of representations in light of the guidelines within eight weeks. Petitioners who had not filed GST returns post 01.07.2017 are permitted to file returns or amended returns pursuant to the differential tax calculation without insistence on interest, penalty or limitation. Further, GST authorities were restrained from taking precipitate action against petitioners for six months from receipt of the order. Liberty to challenge subsequent orders was preserved. [Paras 20]Petitioners to submit representations; employers to decide within eight weeks; petitioners allowed to file/rectify returns without interest/penalty for the relevant period; GST authorities restrained from precipitate action for six months.Final Conclusion: Writ petitions disposed by directing employers/authorities to compute contract wise tax difference between pre GST and post GST periods following the State Circulars and relevant precedents, to reimburse or recover the differential tax as determined (including by entering supplementary agreements where necessary), to consider petitioners' representations promptly, and granting limited procedural reliefs to petitioners including filing of returns without interest/penalty and a six month protection from precipitate GST action. 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 01.07.2017The 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 ActThe 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 GSTThe 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.