Statutory GST Hikes Overrule Contracts; Recovery Paused Until Government Reimbursement is Secured.

The Dispute: Statutory Hikes vs. Fixed-Price Contracts

The Conflict: The petitioner had ongoing contracts with government entities executed prior to July 2022, when the GST rate was 12%. On July 18, 2022, Notification No. 03/2022-Central Tax (Rate) increased the rate to 18%.

The Department’s Demand: The Tax Department demanded the differential 6% tax for all supplies made after the effective date.
The Contractor’s Dilemma: The government departments (the clients) were still paying based on the old 12% rate, leaving the contractor with a massive unfunded tax liability.

The Judicial Verdict

The High Court ruled in favour of the Assessee regarding the timing of the recovery, while upholding the legality of the tax itself:

1. Statutory Rate Prevails Over Contracts

The Court clarified that GST is a statutory levy. Even if a contract says the rate is 12%, a government notification can prospectively increase it to 18%. Parties cannot “contract out” of a tax rate change. Therefore, the 18% rate is legally valid for all work done after July 18, 2022.

2. “Abeyance” of Recovery

In a significant move for the contractor’s cash flow, the Court ordered that the tax recovery be kept in abeyance (paused).

The Logic: Since the government departments (Respondents 6 to 8) are the ones who ultimately owe the tax to the contractor, the Tax Department should not recover it from the contractor until the client departments reimburse them.

3. Six-Month Deadline for Government Departments

The Court directed the relevant government departments to process and secure the reimbursement of the differential 6% GST within six months. Only after this reimbursement is “secured” can the Tax Department proceed with recovery against the contractor.

Key Takeaways for Government Contractors

Check the “Change in Law” Clause: Most government contracts have a “Change in Law” or “Taxes and Duties” clause. Use this judgment to argue that a GST notification is a statutory change that necessitates a contract price revision.
Abeyance as a Shield: If you are facing a demand for the 6% differential, you can seek a stay on recovery by proving that you have initiated reimbursement claims with your client (the Government Department).
Proof of Supply Date: The 18% rate only applies to supplies made after July 18, 2022. Ensure your measurement books (MB) and invoices clearly distinguish between work completed before and after this date.
Interest Liability: The Court noted that other undisputed demands must be paid with interest. Only the “differential tax” arising specifically from this rate change was granted the “abeyance” relief.

HIGH COURT OF MADRAS

Ezhumalaiyan Construction

State Tax Officer Inspection -1^*

C. Saravanan, J.

WP Nos. 7024 & 7032 of 2026
WMP Nos. 7654, 7655, 7660 & 7662 OF 2026

FEBRUARY 24, 2026

R.Suresh Kumar and K.M. Vijayan, Associates for the Petitioner. Mrs. K. Vasanthamala, Govt. Adv. for the Respondent.

ORDER

1. Heard Mr.R.Suresh Kumar, the learned counsel for the petitioner and Mrs.K.Vasanthamala, the learned Government Advocate for the respondents 1 and 2.

2. These Writ Petitions are being disposed of at the time of admission with the consent of the learned counsel for the Petitioner and the learned Government Advocate for the Respondent.

3. The petitioner has challenged the respective impugned orders both dated 16.12.2025 passed for the Tax Period 2022-2023 and Tax Period 2023 -2024, whereby the petitioner has been called upon to pay differential tax at 6% in view of the Notification No.3/2022 – Central Tax dated 13.07.2022 w.e.f. 18.07.2022.

4. It appears that the petitioner has signed agreements for supply of service to respondents 6 to 8 before the above notification came into force whereby the supply of service to Government entities were to be charged tax at the rate of 12%. By the aforesaid notification the tax rate was enhanced from 12% to 18% for service to Government entities. The respective respondents 6 to 8 have also issued letters stating that they have taken up the issue with the Government of Tamil Nadu for reimbursement of the differential tax at 6%.

5. The challenge to the impugned Assessment Orders, in so far as it proposes to demand tax at 18%, cannot be countenanced in view of the above notification. The first respondent, under respondents 2 and 3, are bound to recover tax due from the petitioners as per the above rate notification for the supply service made after 18.07.2022.

6. Therefore, the recovery of the amounts in so far as Defect No.1 in the respective impugned orders can be deferred in view of the communications issued by the respondents 6, 7 and 8, following the decision of this Court rendered in M. Murugesan v. Secretary to Government (Rural Development) Government of Tamil Nadu [W.P.(MD).No. 9095 & 13587 of 2023, dated 25-6-2024] following the order dated 22.09.2023 in W.P.No.22771 of 2023 in Vediappan v. Secretary to Government GSTL 435/101 GST 49 (Madras), wherein it was held as under:-

“This Writ Petition is disposed of after hearing the learned counsel for the petitioner and the learned Special Government Pleader for respective respondents.

2.Although in paragraph No.3 of the counter affidavit, the 6th respondent has stated that the Writ Petition is not maintainable either on law or on facts, in paragraph Nos.6 to 8 of the counter affidavit, there is an undertaking to the effect that the 6th respondent had sought for an approval and for making payment of the differential GST at 6%, which stood enhanced with effect from 18.07.2022. Paragraph Nos.6, 7 & 8 of the counter affidavit of the 6th respondent reads as under:- “

” 6.It is submitted that the current prevailing rate of 12% GST was calculated while preparing the estimate. Hence, the approval and fund for making payment for the 6% difference cost has to be obtained from the competent authority. Action has been taken by this respondent to settle the 6% differences cost. After attending various remarks and observations made by the higher officials, finally this respondent addressed a letter to the Superintending Engineer, National Highways, Salem in Lr.No. 678/2022/A1 dated 17.07.2023 to take necessary action to get the 6% of GST from the National Highways Authority of India for making payment to the Contractor. In turn, the Superintending Engineer, National Highways, Salem has addressed a letter in Lr.No.302/2023/A2 dated 10.08.2023 to the Chief Engineer, National Highways, Chennai recommending to get 6% difference of GST. It is submitted that necessary orders are being expected by this respondent and on receipt of necessary orders and funds, the difference of 6% GST will be settled to the contractor. It is submitted that following part payments with 12% GST have been made in respect of above work.

S.No.	Month	Bill No.	Value of work done (Rs.)	12% GST
1	August 2022	I & Part	8,42,86,022-	1,01,14,323-
2	Sept 2022	II & Part	6,34,99,065-	76,19,888-
3	Sept 2022	III & Part	4,79,19,870-	57,50,384-
4	Nov 2022	IV & Part	3,88,36,525-	46,60,503-
5	January 2023	V & Part	1,99,09,181-	23,89,102-
6	March 2023	VI & Part	3,04,41,694-	36,53,003-
7	June 2023	VII & Part	6,14,81,930	73,77,832
	Total		34,63,74,287-	4,15,65,035-

7.It is pertinent to submit that the bill mentioned in May 2023 is not related to National Highways, Salem Division. It is also submitted that the bills mentioned in February 2023 & April 2023 were raised for different work for which 18% GST has been paid in July 2023.

8.It is submitted that on receipt of necessary funds and orders from the Competent Authority by Project Director, National Highways Authority of India, the petitioner will be settled the difference of 6% GST without any delay.”

3 .Recording the above, the Writ Petition is disposed of by directing the respondents to expedite the reimbursement of tax already paid by the petitioner and to pay the differential tax directly to the account of the respondents 8 & 9. The respondents 8 & 9 are directed not to take any coercive steps against the petitioner as the tax is to be paid to the Government and the amount to be paid also is also by the Government.

4 .The 6th respondent is directed to dispose of the petitioner’s representation dated 21.04.2023 and to take steps for getting the amounts due from the Government as expeditiously as possible, preferably within a period of six months from the date of receipt of a copy of this order.

5 .The Writ Petition is disposed of with the above observations. Consequently, the connected Miscellaneous Petitions are closed. No costs.”

7. Therefore, the respondents 6, 7 and 8 are directed to pursue with the Government to reimburse the due on account of change in rate of tax vide Notification No.3/2022 – Central Tax dated 13.07.2022 w.e.f. 18.07.2022 and the corresponding notification issued by the State Authority. This exercise shall be completed by the respondents 6, 7 and 8 within a period of six months from the date of receipt of this order.

8. Pending such exercise, the recovery of differential tax in so far as Defect No.1 in the impugned order is concerned, shall be kept in abeyance. As far as the other demands confirmed in the impugned order are concerned, if the amounts remain unpaid, the petitioner shall pay the same together with interest and other amounts confirmed vide Impugned Orders.

9. These Writ Petitions stand disposed of with the above directions and observations. No costs. Connected miscellaneous petitions are closed.