GST Interest on Delayed Tax Payment Operates by Force of Law — Karnataka High Court's Ruling in Commissioner of Central Tax v. M/s. Sadguru Infratech Pvt. Ltd.
Background and Context
The Karnataka High Court recently delivered a significant ruling in The Commissioner of Central Tax & Ors. v. M/s. Sadguru Infratech Pvt. Ltd., settling a crucial question around whether courts or tax authorities possess any discretion to waive interest levied under Section 50 of the Central Goods and Services Tax Act, 2017 ("the CGST Act") on delayed payment of tax. The Division Bench allowed the Revenue's appeal in part, overturning specific directions issued by the Learned Single Judge that had granted sweeping reliefs to the assessee — reliefs that the appellate court found to be legally unsustainable.
This ruling holds considerable relevance for the construction and infrastructure sectors, where the transition from the erstwhile VAT/Service Tax regime to the GST regime after July 01, 2017 created significant contractual and fiscal complications for parties whose agreements had been finalised under the pre-GST framework.
Factual Matrix
The Parties and the Underlying Contract
M/s. Sadguru Infratech Pvt. Ltd. ("the Respondent") held registration under the Karnataka Value Added Tax Act, 2003 ("the KVAT Act") and subsequently obtained GST registration with effect from July 01, 2017.
The Karnataka Neeravari Nigam Limited ("KNNL") had floated a tender for the survey, investigation, design, supply, installation, testing and commissioning of a lift irrigation system along with construction of the canal distribution system for the Basaveshwar (Kempwad) Lift Irrigation Scheme. This contract was awarded to M/s. Gayatri-RNS-SIPL JV ("the Main Contractor") through an agreement dated March 06, 2017 — notably, prior to the rollout of the GST regime.
The Respondent, as a constituent member of the joint venture, executed works as a sub-contractor under a works contract dated June 24, 2017 with the Main Contractor. The rates agreed upon in this sub-contract were based on the prevailing Schedule of Rates under the VAT regime and did not factor in any GST component.
The GST Transition Problem
When GST came into force on July 01, 2017, works contracts became subject to GST — initially at 18% for the period July 01, 2017 to August 21, 2017, and at 12% thereafter. This transition significantly increased the Respondent's tax burden, a burden that the original sub-contract pricing had not contemplated.
The Delayed Filing Issue
Simultaneously, the Respondent filed its GST returns for the periods 2017-18, 2018-19, and 2019-20 belatedly. According to the Revenue, delays in payment of self-assessed tax occurred on twenty-six separate occasions, ranging from a single day to as many as 338 days.
Revenue's Action and the Writ Petition
Consequently, the Revenue issued a notice dated February 13, 2020 in Form GST ASMT-10 demanding interest under Section 50 of the CGST Act on account of the delayed tax payments. This was followed by another notice dated February 19, 2020, and thereafter recovery proceedings were initiated through a notice dated March 18, 2020 in Form GST DRC-13 under Section 79(1)(c) of the CGST Act directed to the Respondent's banker.
The Respondent challenged these proceedings by filing a writ petition before the High Court, arguing that the broader question of taxability of works contracts entered into prior to July 01, 2017 was already pending consideration before the Court.
The Single Judge's Order — What Was Directed
The Learned Single Judge, through a common order dated April 11, 2023 ("the Impugned Order"), allowed the writ petition and issued the following directions: