GST Rate Relief for “Works Contracts” by Karnataka High Court

Karnataka High Court has finally passed a judgment in the case of B S Kumar Swamy Versus State of Karnataka, relieving contractors – allowing them to pay GST tax amount on the prevalent VAT (Value Added Tax) rates of pre-GST times, stating the contracts workers are not liable to pay the taxes on the current GST rates.

For the uninitiated, the abovementioned case highlights the writ petitions filed by the contractors who entered “Works Contracts” with the government agencies before July 1, 2017, when the VAT tax regime was followed.

This included case scenarios like the contractors who entered the work contracts pre-GST and were yet to start the actual delivery of services, one’s where they entered the “works contracts” pre-GST and already started working on the contract before the GST regime was introduced, and cases where works were completed before GST, but payments were made after GST rate regime.

Under the new GST regime after 1st July 2017, the new GST rates were implied on them, and they were asked to pay at a GST rate applicable under the GST regime on their contract value as it was assumed that their contracts come under “deemed service.”

Now, the confusion arose that since these contractors entered the agreement before the GST rate regime, why should they pay tax under the applicable GST rates, a substantial differential tax burden not factored in at the time of signing agreements during the VAT regime?

When the petitions hit High Court in Karnataka, the contractors were given justice by the bench headed by Hon’ble Justice Mr. S. Sunil Dutt Yadav: 

“I find considerable force in the submission made by the learned senior counsel for 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,” Justice SR Krishna Kumar wrote in the judgment.

Further, the judgement includes that for the works completed pre-GST under the KVAT regime, the calculation of tax and payments received by the petitioners are to be assessed under the KVAT regime itself. This also includes the works executed pre-GST (prior to 01.07.2017) under the KVAT regime and payments received by the Petitioners.

The court also highlighted that the differential tax amounts paid (if in access) by the petitioners are to be refunded by the employers. This tax amount must be calculated on the GST-inclusive work value for the Balance Work, done or to be done by the petitioners, completed or to be completed after July 1, 2017, is greater than the original agreement work value.  

The Input Credit on the materials is to be arrived at, and it needs to be set off as against the output GST for those assessed under regular Value Added Tax, VAT.

The court also ordered the petitioners to put forth comprehensive representations to their respective employers/respondents within 4 weeks’ time, irrespective of whether any work was done pre-GST under the works contracts or post-GST, or payments were received or yet to be received post-GST. It was also passed that the said employers/ respondents must abide by the judgment passed and fulfill their obligations within 8 weeks of the representation filed by the petitioner.