TaxTMI 
TaxTMI 
Contractual Reimbursement of Incremental GST on Works Contracts and the Statutory-Contractual Divide
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....st, penalty or limitation requirements. • The reimbursement direction in 2026 (7) TMI 519 - KARNATAKA HIGH COURT is confined to the concerned employer. Tax authorities cannot be directed in a contractual reimbursement dispute to permit revised returns contrary to statute or to waive statutory interest, penalty or limitation. • Where the contract supports a tax-adjustment mechanism, a supplementary agreement may document the revised GST-inclusive value. Reimbursement is not automatic merely because GST becomes payable; it depends upon the contractual allocation of tax risk and the resulting computation. Background & Context Works contracts that continued across the commencement of the GST regime gave rise to a recurring commercial dispute: the contractor remained statutorily liable to pay GST on taxable supplies, but the tendered price or schedule of rates may have been formulated under the earlier indirect-tax structure. Contractors consequently sought recovery of the additional or differential tax burden from government departments and other employers. The dispute considered in 2026 (7) TMI 519 - KARNATAKA HIGH COURT concerned works or composite-....
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.... to pay Section 9 of the Central Goods and Services Tax Act, 2017 provides in section 9(1) that central tax is levied on intra-State supplies, on the value determined under section 15, at notified rates, and "shall be paid by the taxable person". The provision establishes the statutory incidence and payment liability. It does not, by its own force, transfer the economic burden of GST to an employer under a works contract. That distinction is decisive. A contractor may be liable to discharge GST as the taxable person, while its claim to recover the corresponding amount from the employer still requires an enforceable contractual basis, such as a tax-variation clause, change-in-law clause, price-adjustment provision, tender clarification, letter of award, or subsequent agreement. Value of supply and additional contractual consideration Section 15 of the Central Goods and Services Tax Act, 2017 states in section 15(1) that the value of supply is ordinarily the "transaction value", namely the price actually paid or payable where supplier and recipient are unrelated and price is the sole consideration. Section 15(2) includes, among other matters, an amount which the supplier ....
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....be read harmoniously. A general inclusive-tax clause may have to be reconciled with a specific clause that permits equitable adjustment on a change in law. Conversely, a demand founded only on the fact that GST became payable cannot displace an unqualified contractual allocation of tax risk. Contract-wise methodology as a reconciliation tool The earlier decision in 2023 (6) TMI 93 - KARNATAKA HIGH COURT adopted a structured methodology for transitional works contracts. It contemplated identification of work executed and payments received under the earlier tax regime; determination of balance work undertaken after GST commencement; derivation of material and earlier-tax components; deduction of KVAT and service-tax components where applicable; addition of applicable GST; and set-off of eligible input tax credit against output GST for contractors assessed under regular VAT. The tax difference was then to be calculated contract-wise. That methodology remains useful as a factual and commercial means of arriving at a revised GST-inclusive work value. It also recognises that a tax component is not necessarily a contractor's profit element. However, after the appellate ruling....
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....ation. In 2019 (8) TMI 858 - MADRAS HIGH COURT, an ongoing pre-GST works contract was dealt with through a mechanism that estimated subsumed taxes, deducted that component from the original contracted value, added applicable GST and contemplated a supplemental agreement. The authority supports the proposition that a transitional contract need not be treated as having a permanently frozen value where the governing adjustment mechanism requires tax reconciliation. It does not dispense with the need to establish that the relevant contractual or administrative mechanism applies to the particular contract. Practical Implications • Contractors should segregate the claim into work performed before and after the GST transition and avoid presenting the full contract value as a single undifferentiated GST claim. • Employers should examine the exact tax clause before accepting or rejecting reimbursement. Particular attention is required where the tender rate is described as inclusive of taxes, but other clauses provide for variation, equitable adjustment or change in law. • A claim computation should identify the original agreed value, earlier-tax ....