Government Contractors Are Entitled to Reimbursement

Government Contractors Are Entitled to Reimbursement of Additional Differential GST Arising From Tax Regime Change

Issue

Whether a government civil contractor who paid additional differential GST arising from the transition from VAT to GST on an ongoing works contract is legally entitled to reimbursement from the state government employer.

Facts

Contract Award: The petitioner, a civil contractor, was awarded a road works contract by the respondents (State government/authorities).
Tax Regime Change: During the execution of the contract, the Goods and Services Tax (GST) regime was introduced on July 1, 2017, replacing the Value Added Tax (VAT) framework and increasing the tax burden on works contract services.
Tax Payment: The petitioner discharged the differential GST liability directly before the competent tax authority.
Inaction on Reimbursement: Despite executing the work and paying the extra tax, the petitioner’s requests for reimbursement of the differential GST were met with inaction by the respondents.
Writ Petition: The petitioner filed a writ petition under Article 226 of the Constitution seeking directions against the State for reimbursement.

Decision

Settled Legal Position: Relying on established precedents (including M.G. Arunkumar v. State of Karnataka), the High Court reaffirmed that the recipient of works contract services is ultimately liable to bear the differential tax burden caused by the statutory shift to GST.
Legal Right to Reimbursement: Since the petitioner discharged the differential tax and the State was the sole beneficiary of the works contract, the petitioner acquired a clear legal right to be reimbursed.
Binding Duty on State: The State and its departments are under a legal obligation to reimburse the additional tax attributable strictly to the introduction of GST.
Directions Issued: The High Court allowed the writ petition, directing the respondents to consider the contractor’s representation, verify the claims, and determine the exact differential GST amount for reimbursement in accordance with the law.
Outcome: Decided entirely in favor of the assessee/petitioner.

Key Takeaways

Service Recipient Bears Tax Escalation: Statutory tax increases resulting from major legislative shifts (like the VAT-to-GST transition) must be borne by the service recipient (the State/employer), not absorbed by the contractor.
Strict Statutory Alignment: Reimbursement rights apply specifically to the incremental tax differential created by the new tax regime, subject to verification of actual payment by the contractor.
Enforceability via Writ: Inaction by government departments in reimbursing statutory tax differentials on completed public works contracts can be remedied directly through High Court writ jurisdiction under Article 226.

HIGH COURT OF KARNATAKA

Naganath Constructions Engineers and Contractors

Government of Karnataka

Sachin Shankar Magadum, J.

WRIT PETITION NO. 106128 OF 2026 (GM-RES)

AUGUST 4, 2026

Smt. Vidyashri N. Mulimani, Adv. for the Petitioner. Smt. Kirtilata R. Patil, HCGP for the Respondent.

ORDER

1. The petitioner is seeking mandamus directing the respondents to reimburse the differential Goods and Services Tax (for short ‘GST’) amount of Rs.1,50,935.68/- with interest at the rate of 18% per annum from the date of remittance till realization in terms of representation dated 25.06.2026 as per Annexure-A.

2. Heard learned counsel for the petitioner and learned HCGP appearing for respondents-State. Perused the records.

3. The petitioner, a Class-I Registered Civil Contractor, was entrusted with the work of rectification of road surface, recerpetting and improvements of Kuchegar Kodar Road from KM 0.00 to 2.00 in Karwar Taluka, Uttara Kannada District. It is the specific case of the petitioner that during the currency of the contract, the Goods and Services Tax (GST) regime came into force with effect from 01.07.2017, replacing the earlier Value Added Tax (VAT) regime. Consequent upon such introduction of GST, the petitioner was required to bear additional tax liability and, therefore, claims reimbursement of the differential tax amount from the respondents-State.

4. The controversy relating to liability to bear the differential tax consequent upon introduction of GST is no longer res integra. In an identical matter in M.G. Arunkumar v. State of Karnataka (Karnataka)/W.P.No.104908/2023, disposed of on 29.08.2023, this Court has held that the recipient of the works contract service is liable to bear the differential tax liability arising on account of introduction of GST. This Court has further held that the State, its instrumentalities and Departments are under an obligation to reimburse the differential GST amount payable by the contractor.

5. In the present case, the petitioner has already discharged the differential GST liability before the competent authority. Alleging inaction on the part of the respondents in reimbursing the said amount, the present writ petition is instituted. In view of the consistent line of decisions rendered by this Court on the issue, the petitioner has acquired a corresponding legal right to seek reimbursement of the differential GST amount. The respondents, being beneficiaries of the work executed by the petitioner and in view of the law laid down by this Court, are under a bounden duty to reimburse the differential GST amount. Therefore, this Court is of the view that the petitioner has made out a case for issuance of a writ of mandamus.

6. For the foregoing reasons, this Court proceeds to pass the following:

ORDER

(i)

The writ petition is allowed.

(ii)

The respondents are directed to consider the representation dated 25.06.2026 (Annexure-A) and determine the differential GST amount payable to the petitioner in accordance with law.

(iii)

Upon such determination, the respondents shall reimburse the differential GST amount to the petitioner within a period of six weeks from the date of receipt of a certified copy of this order.

(iv)

It is made clear that the reimbursement shall be confined only to the differential tax liability attributable to the introduction of the GST regime and shall be subject to verification of records and calculations in accordance with law.