Courts Cannot Waive GST Interest, Penalty or Limitation Due to Contractual Dispute: Karnataka HC [Read Order]

The KarnatakaHigh Court has held that a contractual dispute between the contractors and the government employers regarding the reimbursement of incremental GST liability consequent to the transition from the KVAT regime, cannot supersede the statutory mechanism governing the levy of tax, interest and penalty strictly. The Division Bench set aside the order of the Single Judge to the extent it directed the GST authorities to allow filing of updated returns without insisting on required interest, penalty or limitation periods.

The Division Bench comprising Chief Justice Mr. Vibhu Bakhru and Justice K.S. Hemalekha has partly approved a batch of writ appeals filed by GST and Central Tax authorities. The appeals were directed against a single judgement dated 11th April, 2023 given by a learned Single Judge in a batch of writ petitions filed by hundreds of contractors and building companies.

The factual matrix of the issue was the award of works contracts by different ministries, agencies and instrumentalities of State Government. The petitioners had successfully bid for these contracts and entered into agreements prior to the establishment of the Goods and Services Tax (GST) regime on July 1, 2017.

The contracts were based on the Schedule of Rates applicable under the Karnataka Value Added Tax (KVAT) Act and most of the contractors paid their tax liability at a composite rate of 4%. But, the tax burden under GST system shot up to 12% or 18% if a part of the activity was accomplished or invoices were raised after July 1, 2017. The contractors said that their quoted rates had factored in the 4% KVAT and had not accounted for the increased GST burden.

The tax authorities issued notices to the contractors demanding GST at the expanded rates, requesting a declaration that GST would not be applicable to their current contracts and asking the government departments to shoulder the incremental tax burden.

The Single Judge approved the writ petitions and issued comprehensive guidance to the government employers to compute the differential tax, enter into supplementary agreements and reimburse the contractors. The Single Judge also gave protective directions to the tax authorities and permitted the contractors to file or rectify their GST returns on the basis of this differential calculation “without insisting on interest or penalty or limitation” and restrained the GST department from taking any coercive action for a period of six months.

The tax authorities, dissatisfied with these protective orders, moved the Division Bench. The counsel for the appellants argued that the ruling of the Single Judge, in effect, rewrote the terms of the CGST Act, 2017. It was submitted that imposition of interest under Section 50 of the CGST Act is automatic and mandatory and no Court has plenary power to waive the same or prolong the statutory limitation for submitting returns on the ground that the underlying contract is in dispute.

The Division Bench fully agreed with the tax officials. The court observed that the issue as to who shall pay the additional tax is purely contractual between the contractors and their respective employers. The employers may be legally liable to reimburse the contractors but this private contractual agreement does not have the effect of altering, diluting or overriding the statutory scheme for assessment, levy and recovery of GST.

The Court noted that the responsibility to pay GST to the State is a matter of the legislative prescription. Thus, directives to the tax authorities to authorise filing of updated returns contrary to the statutory scheme could not have been given nor can the necessary levy of interest and penalty be cancelled by the court.

The Division Bench quashed and set aside the impugned order of the Single Judge only to the extent it issued directions to the GST/tax authorities for waiver of interest, penalty, limitation and restraint on coercive action. The Court made it clear that the directions regarding the calculation of differential tax and reimbursement continue to be valid and are to be strictly understood as directions binding on the involved government employers and not on the tax department.