Karnataka HC lays down Guidelines to determine Tax Liability on Works Contracts entered into during Pre-GST Period [Read Order]

The  Karnataka High Court has issued directions and guidelines to State and Central tax authorities for determination of liability on contracts entered into during the pre-GST regime.

The Petitioners are class-I contractors who have entered into 'works contract' with various Slate Govt agencies as employers and petitioner contractors and the agreements were entered into at a point of time when the KVAT Act and Finance Act, 1994 were in force.

It was the contention of the Petitioners that they were registered under KVAT by obtaining TIN number and after introduction of GST from 01.07.2017, they have obtained GST registration numbers specifically and individually.

Most of the Petitioners are covered under the composition scheme in terms of Section 15 read with Rule 135 of the KVAT Act except for a few Petitioners who are under the regular VAT assessment under KVAT Act.

For the Petitioners who are covered under the composition scheme, the tax under KVAT Act was at 4% on the transaction va:ue of the contract and for those who are covered under the regular VAT assessment, it was either 5% or 12% as the ease may be. Under the Finance Act 1994, service tax had been exempted in respect of the Works Contract rendered to Government and statutory agencies and therefore, there was no Service Tax which was liable to be paid by the Petitioners on the works contract executed by them.

The Petitioners who opted for the composition scheme under Section 15 were nct entitled the

claim input credit of CENVAT input in case of there being any inter-State purchase in the course of execution of works contract.

Petitioners were filing their returns in Form 100 by paying 4% composition tax on receipts and the employers would deduct 4% tax and certificate was being issued in Form 156 of the KVAT Act and the amount which was deducted is credited to the VAT account of the Petitioners.

Petitioners contended that 01.07.2017 when the Goods and Services Tax (GST) Act came into effect/force, the works contract was treated as "deemed service" and the Petitioners were liable to pay GST at 18% from 01.07.2017 to 21.08.2017 and at 12% from 22.08.2017 onwards.

It is this differential tax amount arising out of change in tax regime from VAT to GST with effect from 01.07.2017 which has resulted in a heavy burden being imposed upon the Petitioners. It is contended that there are instances where the Petitioners have already carried out and completed the works even prior to 01.07.2017 for which inspection and invoices are yet to be raised or payments are yet to be received by the Petitioners.

There were also instances where works have commenced and most of the work is completed but invoices are yet to be raised by means of inspection to be conducted by the designated/competent authority to such works.

Additionally, it was submitted that there were contracts which are entered prior to 01.07.2017 during the KVAT regime ard works continued during GST regime, contracts which are entered prior to 01.07.2017 under the KVAT regime where works are completed and the payments are due and payable under GST regime as well as contracts for which tenders were called during VAT regime and finalized during GST regime but under old schedule of rates (SR).

The Karnataka High Court observed that,  “I find considerable force in the submission made by the learned Senior counsel for the 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; that looking into the nature of such payment of GST, the respondents/employers are required to mor the same after determining the differential tax burden.”

“Especially for the Petitioners who are before this court where "works contract" were entered prior to 01.07.2017 during KVAT regime and works are completed pre-GST but payments are made post-GST or Contracts entered prior to 01.07.2017 but partly executed pre-GST and balance work executed post-GST or Contracts for which tenders were invited during KVAT regime and finalized after 01.07.2017 under GST regime or contracts which were invited during KVAT regime under old schedule of rates (SR) but finalized under GST regime and that a certain procedure is required to be followed to determine the amount payable by or to the works contractors/Petitioners”, the bench noted.

The Single  Bench of Justice S R Krishna Kumar issued the Respondents-State and other Govt agencies Respondents who have entered into works contract with the Petitioners with these directions/guidelines:-

(a) Calculate the works executed pre-GST (prior to 01.07.2017) under KVAT regime and payments received by the Petitioners.

(b) The payments received by the Petiüoners pre-GST for such works executed before  01.07.2017 are to be assessed under KVAT tax regime — either under COT or VAT scheme as applicable.

(c) Calculate the balance works to be completed or completed after 01.07.2017, in the original contract.

(d) Derive the rate of materials, KVAT items required or used to complete the balance works.

(e) Deduct the "KVAT" amount from those materials and the service tax, if applicable.

(f) Add the applicable "GST" on those items.

(g) 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.

To Read the full text of the Order CLICK HERE

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