Transitional tax treatment of works contracts requires segregation of pre-GST and post-GST execution for contract-wise computation.

Works contracts straddling the GST commencement date must be assessed by separating the pre-01.07.2017 and post-01.07.2017 components for tax purposes. The court accepted that the tax element is not a profit component and held that work executed before GST remained subject to the earlier regime, while work executed after GST commencement fell under GST. It further required contract-wise computation of the differential tax burden, with input tax credit and any necessary supplementary agreement taken into account, and directed reimbursement or adjustment where the revised GST-inclusive value exceeded the original contractual value.

---

---

Issues: Whether works contracts entered into before the introduction of GST, but executed partly before and partly after 01.07.2017 or paid for after that date, required segregation of pre-GST and post-GST portions for tax purposes and consequential computation of differential tax burden.

Analysis: The petitions concerned class-I contractors who had entered into works contracts during the KVAT regime and were later subjected to GST on work executed or paid for after 01.07.2017. The dispute turned on the proper allocation of tax liability between the earlier regime and the GST regime, in light of the State circulars dated 03.01.2020 and 14.12.2020 and the approach adopted in similar cases. The Court accepted that the tax component is not a profit element and that the works executed before 01.07.2017 must be dealt with under the earlier tax regime, while the balance work executed after GST commencement must be assessed under GST. It further directed that the differential tax burden be computed contract-wise, with input tax credit and any necessary supplementary agreement taken into account.

Conclusion: The issue was answered in favour of the petitioners to the extent that the respondents were directed to segregate pre-GST and post-GST work, compute the differential tax burden, and consider reimbursement or adjustment accordingly.

Final Conclusion: The petitions were disposed of with operative directions requiring the employers and authorities to apply a transitional, contract-wise methodology for assessing tax liability and to grant consequential monetary adjustment where the revised GST-inclusive value exceeded the original contractual value.

Ratio Decidendi: For works contracts straddling the transition from the pre-GST regime to GST, tax liability must be determined separately for the work executed before and after the appointed date, and the parties must account for differential tax burden and input tax credit on a contract-wise basis.

---