Resolving Incremental GST Burden on Transitional Works Contracts: Karnataka High Court Mandates Employer Reimbursement Over Statutory Waivers

The transition from the erstwhile Value Added Tax (VAT) and Service Tax regime to the Goods and Services Tax (GST) framework introduced significant transitional challenges, particularly for long-term works contracts. For agreements executed prior to the GST rollout but completed afterward, the sudden shift in tax rates and mechanisms created an unexpected financial burden on the executing contractors.

Recently, the Karnataka High Court addressed these complexities in the landmark judicial proceedings of Sadashiv S. Bennali Vs Assistant Commissioner of Commercial Taxes. The Court provided vital clarity on how the incremental tax burden must be handled, drawing a firm line between the commercial obligations of the employer to reimburse the assessee and the uncompromising statutory mandate of the tax authorities to collect dues without equitable waivers.

Background of the Dispute: The Transitional Tax Burden

When the Central Goods and Services Tax Act, 2017 came into force, it overhauled the indirect taxation landscape. Works contractors who had bid for and secured government or private projects under the Karnataka Value Added Tax (KVAT) regime suddenly found themselves subject to the new GST framework for the unexecuted portions of their contracts after 1-7-2017.

This transition often resulted in a higher tax incidence. The core conflict emerged when the executing contractors (the assessees) sought compensation for this differential tax burden. They argued that since the original contract values were locked in under the pre-GST tax assumptions, the employers (often state departments or agencies) should bear the incremental GST cost. Furthermore, many assessees sought relief from the tax authorities regarding penalties and interest for delayed or revised filings necessitated by this confusion.

The Assessee's Pleas in the Present Petitions

In the writ petitions W.P.No.100867/2026 and W.P.No.100887/2026, the assessee approached the Karnataka High Court seeking a writ of mandamus against the respondents. The primary reliefs sought by the assessee included: