Karnataka High Court clarifies GST adjustment for works contracts covering pre- and post-GST periods

1. Background of the dispute

The Karnataka High Court in Basayya Vs Assistant Commissioner of Commercial Taxes (Writ Petition No.102192 of 2026 (T-RES), order dated 06/08/2026) addressed how Goods and Services Tax (GST) should be adjusted in respect of works contracts that commenced under the KVAT regime and continued into the GST era after the introduction of the Central Goods and Services Tax Act, 2017 (CGST Act).

The assessee, a works contractor, executed contracts that began prior to 01.07.2017 (when GST was introduced) but extended beyond that date. This gave rise to issues regarding:

  • How much of the contract should be taxed under the KVAT regime and how much under GST;
  • Whether the assessee was entitled to reimbursement/refund of differential GST paid, where the employer (a Government department/agency) did not bear such tax; and
  • The validity of an adjudication order issued under Section 74(9) of the GST law for FY 2017-18.

The writ petition raised a combination of constitutional, substantive and procedural challenges against the existing GST treatment of such contracts, in light of the transition from VAT to GST.

2. Reliefs sought by the petitioner

In the writ petition, the assessee requested several distinct forms of relief from the Karnataka High Court, including:

2.1 Constitutional challenge

The assessee sought:

  • A declaration that Section 7(3) read with Clause 6 of Schedule II of the GST Act is ultra vires Article 366 (12A), (26A), (29A) (b) & (f) of the Constitution of India, relying on principles laid down by the Supreme Court on the nature of “works contract”.

2.2 Reimbursement of differential GST

The petitioner also prayed for directions:

  • To Respondent No.2 (employer) to reimburse the differential GST (difference between GST at 12% or 18% and the VAT rate) which was allegedly paid by the assessee on works contracts, without recovering such amount from Respondent No.2, based on a sample work order dated 23/05/2017 to 15/06/2017 (Annexure-C).

2.3 Policy/circular for transition contracts

The petitioner requested that:

  • Respondent No.5 (State Government) be directed to issue a circular or policy clarifying payment of GST on works contracts that were either:
    • Executed under the VAT regime, or
    • Executed or continued after introduction of GST, but where bills were raised after the GST implementation date, and
    • In such situations, GST was not paid by Respondent No.2 but was discharged by the assessee to the GST department.

2.4 Nature of GST as indirect tax and reimbursement

The assessee further sought:

  • A declaration that GST, being an indirect tax based on the “collect and pay” principle, imposes liability on the registered person only after collecting tax from the recipient of services (here, the employer under the works contract); and
  • A consequential direction to Respondent No.2 to pay/refund/reimburse tax already paid by the assessee from its own funds (without collection from Respondent No.2) for all contracts executed till date.

2.5 Challenge to adjudication order under Section 74(9)

Additionally, the petitioner sought:

  • A writ of Certiorari to quash the adjudication order bearing No. CTO/LGSTO-310/ORDER-74/50/2024-25/B-5464 dated 04.02.2025 passed under Section 74(9) for FY 2017-18 (Annexure-D).

2.6 General relief

The petitioner also requested any further reliefs deemed just and appropriate by the Court.

Both sides agreed that the main controversy was the method and manner of adjusting GST in respect of works contracts that straddle the pre-GST (KVAT) period and post-GST (CGST/SGST) period.

The dispute was not limited to the petitioner’s individual contract alone, but fell within a broader issue previously examined by the Karnataka High Court in Chandrashekharaiah Vs. State of Karnataka (Order dated 11.04.2023 in W.P.No.9721/2019). That earlier decision had laid down detailed directions/guidelines on how to prorate and adjust tax between the pre-GST and post-GST segments of a works contract.

In the present matter, both the assessee’s counsel and the learned AGA jointly brought to the Court’s notice that this previous decision in Chandrashekharaiah Vs. State of Karnataka governed the core aspect of GST adjustment, subject to subsequent developments at the Division Bench level.

4. Reference to Chandrashekharaiah Vs. State of Karnataka

4.1 Directions issued by the Co-ordinate Bench

In Chandrashekharaiah Vs. State of Karnataka, a Co-ordinate Bench had disposed of similar writ petitions involving works contracts spanning the VAT and GST regimes. The operative portion of that order included the following directions/guidelines to the State and Government agencies that had entered into works contracts with the petitioners:

  1. Segregation of work done pre-GST

    • Calculate the quantum of work executed before 01.07.2017 under the KVAT framework, along with payments received for such work.