GST Liability is Statutory, Not Contractual: Karnataka HC Sets Aside Order Directing State to Pay Contractor's Tax Dues [Read Order]

In a recent ruling clarifying the separation between contractual rights and statutory tax obligations, the Karnataka High Court has set aside a Single Judge order that had directed the State Finance Department and tax authorities to pay the GST dues, including interest and penalty, of a works contractor.

The dispute originated from a contract awarded in March 2017 by the Karnataka Urban Water Supply and Drainage Board (the Employer) to a joint venture comprising M/s Sudhanva Engineers and Builders and two other entities for pipeline and pump set works worth over ₹40 Crores.

The original contract, finalized just months before the rollout of the GST regime on July 1, 2017, factored in a 4% VAT. When the GST at 12% (later 18%) became applicable to the balance works, the contractor claimed it had to bear an additional incremental tax burden of nearly ₹3.08 Crores.

When the Board refused to reimburse this differential tax, the contractor defaulted on its GST payments. The commercial tax department subsequently issued a show cause notice, culminating in a demand order in December 2023 for ₹2.42 Crores, along with 18% interest and a 10% penalty, taking the total cumulative demand to ₹4.84 Crores.

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To escape this recovery, the contractor approached the High Court via a writ petition. The Single Judge allowed the petition, relying on a prior division bench decision in Sri Chandrashekaraiah.

The Single Judge directed the State and the Commercial Tax Department to pay the contractor's GST dues directly to the tax authorities. Crucially, the impugned order also adopted the Chandrashekaraiah guidelines, which permitted contractors to file amended returns based on differential tax calculations and explicitly waived statutory interest, penalties, and limitation periods under the GST Act.

The State Finance Department and the Commercial Tax Department filed the present writ appeal before the division bench of Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha.

The division bench held that a contract between a contractor and an employer does not alter the statutory scheme for the levy of GST. The bench ruled that the liability to pay GST, its assessment, recovery, and enforcement, are matters of strict statutory prescription.

The Court drew a clear line between contractual disputes and statutory compliance. While the dispute over whether a contractor is entitled to reimbursement of incremental tax is strictly a contractual matter between the contractor and the Employer.

The High Court set aside the directions issued to the tax authorities and the State. Further clarified that any direction regarding the reimbursement of tax must be construed strictly as a direction limited to the concerned Employer (the Water Supply Board) under the contract, and not a mandate for the State or GST authorities to pay the contractor's dues.

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