Differential GST On Pre-GST Works Contracts To Be Reimbursed By State Agencies: Karnataka High Court

The Karnataka High Court ruled that the additional GST liability arising out of the shift from the pre-GST VAT (Value Added Tax) regime to the GST regime in ongoing works contracts cannot be imposed on contractors.

The bench consists of Justice M Nagaprasanna, who directed the State Departments and government agencies to reimburse the differential GST to contractors.

All the contracts were awarded prior to July 2017 under the KVAT regime, where the contract rates factored in VAT and service tax.

After the introduction of GST, the ongoing and balance works under these contracts were treated as "deemed services," making the petitioner liable to pay GST on post-GST execution and payments released after GST.

The bench reiterated that tax is an independent statutory component that contractors do not retain as profit and that the additional GST burden arising due to the transition from VAT to GST must be neutralized by the employer-departments.

In view of the above, the bench directed the department to compute the tax liability separately for pre-GST and post-GST periods, determine the differential tax after adjusting the input tax credit, and reimburse the exceeded GST liability.

"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 honour the same after determining the differential tax burden, especially for the Petitioners who are before this court where “works contract” were entered prior to In this case, the petitioner, a construction company, had executed multiple work contracts for different departments and undertaking of the State of Karnataka.01.07.2017 during KVAT regime", the court observed

The court further directed the department to consider the petitioner's representation, permit the filing of GST returns without interest or penalty, and refrain from taking any coercive action for six months.

Case Title: N.R. Kulkarni NRK Construction Company v. Union of India

Citation: 2026 LLBiz HC (KAR) 6

Case Number: WRIT PETITION NO. 145682 OF 2020

Counsel for Petitioner: Shivraj S Balloli

Counsel for Respondent: T. Hanumareddy, AGA, S.M. Kalwad, M.M. Patil, R.M. Kulkarni, Bushan B. Kulkarni