Facts of the Case

The petitioner, M/s Bhanjadeo Constructions, approached the High Court challenging the action of the State authorities in not reimbursing the differential tax amount arising from the change in the tax regime from VAT to GST with effect from 01.07.2017.

The principal grievance was that the introduction of GST created an additional tax burden that had not been envisaged when the relevant works contract agreement was originally entered into.

The Court noted that a batch of writ petitions had been filed on the same issue concerning difficulties faced by contractors due to the changed tax treatment of works contracts under GST.

At the Bar, it was submitted that the present writ petition was identical to W.P.(C) No. 38490 of 2021 and could be disposed of in terms of the order dated 14.12.2021 passed in that matter.

The Court further considered the revised guidelines relating to works contracts under GST issued by the Government of Odisha, Finance Department, through Office Memorandum No. FIN-CTI-TAX-0045-2017/38535/F dated 10.12.2018, which superseded the earlier guidelines dated 07.12.2017.

Issues Involved

The principal issues involved were:

  1. Whether a works contractor could seek reimbursement or adjustment of the differential tax burden arising from the transition from VAT to GST with effect from 01.07.2017.
  2. How the amount payable should be determined where the tender was invited before 01.07.2017 on the basis of the pre-revised SoR-2014, but the balance work or full work was executed or paid for after implementation of GST.
  3. Whether the petitioner’s grievance was required to be considered under the revised guidelines dated 10.12.2018 issued by the Finance Department, Government of Odisha.
  4. Whether the petitioner should first approach the competent authority through a comprehensive representation for determination of the GST-inclusive value of the balance work.
  5. Whether protection against coercive action should continue until the competent authority decided the petitioner’s representation.
  6. Whether the present petition should be disposed of consistently with the order dated 14.12.2021 in W.P.(C) No. 38490 of 2021, the matter stated to be identical to the present case.

Petitioner’s Arguments

The petitioner contended that the authorities had failed to reimburse the differential tax amount resulting from the change in the tax regime from VAT to GST.

The petitioner’s essential grievance was that, due to introduction of GST, it was required to bear a tax liability that had not been envisaged at the time of entering into the original agreement.

The petitioner relied upon the practical difficulty faced by works contractors whose tenders and contractual rates had been determined under the earlier tax regime but whose works continued or were paid for after GST came into force on 01.07.2017.

It was also submitted at the Bar that the case was identical to W.P.(C) No. 38490 of 2021, and therefore should be disposed of in terms of the order dated 14.12.2021 passed in that matter.

Respondents’ Arguments

The State authorities placed reliance on the revised framework issued by the Government of Odisha for dealing with works contracts affected by the GST transition.

The Court recorded that the Government had issued revised guidelines through the Finance Department’s Office Memorandum dated 10.12.2018, in supersession of the earlier guidelines dated 07.12.2017.

The revised guidelines had been framed after consideration of representations from contractors claiming additional amounts towards GST in respect of works put to tender before 01.07.2017 but executed partly or wholly after 01.07.2017.

The order does not separately record an elaborate oral argument by the State beyond the revised guidelines and the submission regarding disposal of the petition in line with the identical matter. Therefore, no additional stand should be attributed to the respondents beyond what is expressly reflected in the order.

Court Order / Findings

The High Court disposed of the writ petition with specific directions.

The Court held that the petitioner should make a comprehensive representation before the appropriate authority within four weeks from the date of the order, setting out its grievance.

If such representation was filed, the competent authority was directed to:

  • consider the petitioner’s grievance in light of the revised guidelines dated 10.12.2018 issued by the Finance Department, Government of Odisha;
  • dispose of the representation as expeditiously as possible;
  • preferably decide it within three months from the date of receipt of the certified copy of the order.

The Court further clarified that if the petitioner remained aggrieved by the authority’s decision, it would be open to the petitioner to challenge that decision in accordance with law.

Importantly, the High Court directed that no coercive action should be taken against the petitioner until the authority takes a decision.

Accordingly, the writ petition was disposed of without the Court itself quantifying the differential tax reimbursement.

Important Clarification

The judgment does not grant automatic reimbursement of the entire GST differential amount merely because the contract was entered into before 01.07.2017.

Instead, the Court directed that the petitioner’s claim be examined under the specific computational and procedural mechanism contained in the Odisha Government’s revised guidelines dated 10.12.2018.

This distinction is important because the revised guidelines contemplate both possible outcomes:

  • where the revised GST-inclusive value of the balance work exceeds the original agreement value for that balance work, the contractor may be reimbursed for the excess amount; and
  • where the revised GST-inclusive value is lower than the original agreement value, payment may be reduced, and excess payment already made may be recovered.

Therefore, the revised mechanism is not merely a blanket contractor-benefit scheme; it is a structured recalculation mechanism intended to determine the appropriate contractual value after transition to GST.

Detailed Revised Guidelines for Works Contracts Under GST

The Court reproduced the revised guidelines dated 10.12.2018 in substantial detail. Their key features are as follows:

1. GST treatment of works contracts: GST came into force with effect from 01.07.2017 by subsuming indirect taxes including Excise Duty, VAT, CST, Entry Tax and Service Tax. Works contracts are treated as a composite supply of service under GST and may be taxable at 18%, 12% or 5%, depending upon the nature of the works contract.

2. Revision of Schedule of Rates: The State Government revised SoR-2014 with effect from 01.07.2017. Whereas the earlier SoR-2014 item rates included various embedded taxes, the revised SoR excluded such taxes. Accordingly, estimates for post-01.07.2017 work were to determine GST-exclusive work value first and thereafter add GST at the applicable rate.

3. Tax invoice requirement: A works contractor under GST is required to issue a tax invoice separately showing:

  • taxable work value; and
  • GST comprising CGST and SGST.

4. Pre-GST tenders with post-GST execution/payment: Where the tender was invited before 01.07.2017 on the basis of SoR-2014 but payment for balance work or full work arose after GST implementation, the prescribed procedure was to be followed.

5. Identification of balance work: Item-wise quantities of work completed after 30.06.2017 were required to be identified, and their value under the original agreement based on pre-revised SoR-2014 had to be ascertained.

6. Revised estimated work value: The revised estimated value of the balance work was to be determined according to Revised SoR-2014.

7. Items not covered by Revised SoR-2014: Where rates of goods or services were not covered, the tax-exclusive basic value had to be determined by removing embedded incidences of VAT, Entry Tax, Excise Duty, Service Tax and other relevant taxes from the estimated or quoted price.

8. Tender premium or discount: The revised estimated value of the balance work was to be enhanced or reduced in the same proportion as the applicable tender premium or discount.

9. Addition of GST: Applicable GST at 5%, 12% or 18%, as the case may be, was then to be added to determine the GST-inclusive work value of the balance work.

10. Supplementary agreement: A supplementary agreement was required to be signed with the contractor for the revised GST-inclusive value of the balance work.

11. Reimbursement where revised value is higher: If the revised GST-inclusive value exceeded the original agreement value of the balance work, the contractor was to be reimbursed for the excess.

12. Reduction or recovery where revised value is lower: If the revised GST-inclusive value was lower than the original agreement value, payment was to be reduced accordingly. Where excess payment had already been made, the excess amount was liable to be recovered.

13. Applicability to different contract modes: The procedure was made applicable to all works contracts, including EPC, Turn-key and Lumpsum contracts.

14. F2 contracts: For F2 contracts, the taxable value under GST for each item of balance work was to be determined by the competent authority after applying the premium or discount offered by the contractor on the respective item.

Sections / Statutory and Administrative Provisions Involved

The order primarily concerns the following legal and administrative framework:

  • Goods and Services Tax regime effective from 01.07.2017
  • Works contract treated as composite supply of service under GST
  • Applicable GST rates of 5%, 12% or 18%, depending upon the nature of the works contract
  • Odisha Finance Department Guidelines dated 07.12.2017
  • Revised Guidelines dated 10.12.2018
  • Office Memorandum No. FIN-CTI-TAX-0045-2017/38535/F dated 10.12.2018
  • Revised Schedule of Rates-2014
  • Works Department OM No. 13827/WD dated 16.09.2017, effective from 01.07.2017
  • Pre-GST works contracts executed partly or wholly after 01.07.2017
  • Mechanism for determination of GST-inclusive balance work value
  • Supplementary agreement requirement
  • Reimbursement, reduction and recovery mechanism under the revised guidelines

Link to download the order - https://mytaxexpert.co.in/uploads/1783329611_1121compressed.pdf

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