• Dated 21^st April, 2026

Statutory GST Rate Prevails Over Contracts; Courts Grant Relief via Deferred Recovery

BRIEF FACTS:

The Assessee, engaged in providing construction services to various Government departments, had entered into contracts prior to 18.07.2022 wherein GST was applicable at the rate of 12%. Subsequently, pursuant to Notification No. 3/2022-Central Tax dated 13.07.2022, the applicable GST rate on such services was increased to 18% with effect from 18.07.2022. In view of this change, the department issued assessment orders dated 16.12.2025 for the tax periods 2022–23 and 2023–24, demanding a differential GST of 6% on supplies made after the effective date of the notification. Aggrieved by the said demand, the Assessee challenged the validity of the assessment orders before the Hon'ble High Court.

ASSESSEE'S CONTENTION:

The Assessee contended that the contracts for providing construction services to Government departments were executed prior to the change in GST rate, when the applicable tax was 12%, and therefore the same rate should continue to apply as per the agreed contractual terms. It was argued that the subsequent increase of GST to 18% was not contemplated at the time of entering into the contracts, and hence the additional burden of 6% could not be passed on, resulting in significant financial hardship to the Assessee. Further, the Assessee pointed out that the concerned Government departments had already initiated steps to seek reimbursement of the differential tax arising due to the rate change, which indicated that the liability would ultimately be borne by the Government. In such circumstances, the Assessee submitted that coercive recovery proceedings by the department were unwarranted and unjustified, and accordingly challenged the demand of differential tax as being arbitrary and unsustainable.

DEPARTMENT'S CONTENTION:

The Department contended that GST is a statutory levy governed strictly by the provisions of law and applicable notifications, and therefore any change in the rate of tax operates prospectively irrespective of the terms agreed upon in private contracts. It was submitted that pursuant to Notification No. 3/2022-Central Tax dated 13.07.2022, the applicable GST rate on the services in question stood enhanced to 18% with effect from 18.07.2022, and consequently, all supplies made on or after that date are mandatorily liable to tax at the revised rate. The Department further argued that the assessing authority is legally bound to implement and enforce such statutory notifications and has no discretion to deviate based on contractual arrangements between parties. Accordingly, the demand for the differential 6% tax was asserted to be lawful, valid, and recoverable from the Assessee in accordance with the provisions of the GST law.

DECISION:

The Court held that GST being a statutory levy, the rate prescribed under a valid notification would prevail over any contrary terms agreed between the parties in a contract. Accordingly, once the rate of tax was enhanced to 18% with effect from 18.07.2022 by Notification No. 3/2022-Central Tax, all supplies made on or after that date were liable to be taxed at the revised rate, irrespective of the fact that the contracts were executed earlier at 12%. On this basis, the Court upheld the legality of the differential tax demand of 6%. However, considering the practical difficulties faced by the Assessee and the fact that the Government departments had already undertaken steps to reimburse the additional tax burden, the Court granted equitable relief by directing that recovery of the differential tax be kept in abeyance for the time being. It further directed the concerned departments to secure reimbursement of the said amount within a period of six months. At the same time, the Court clarified that any other dues confirmed in the assessment orders, if remaining unpaid, must be discharged by the Assessee along with applicable interest.

BTA's COMMENT:

The key takeaway from the judgment is that tax liability under GST is governed strictly by statutory provisions and notifications, and not by the terms of private contracts. Accordingly, any change in the rate of tax automatically applies to supplies made after the effective date, even if such supplies arise from pre-existing contracts. At the same time, the Court recognized that in certain situations particularly involving government contracts where the additional tax burden is ultimately to be borne by Government authorities and a genuine reimbursement mechanism is already in motion, equitable relief such as deferment of recovery may be granted to avoid undue hardship to the Assessee. From a practical standpoint, this judgment serves as an important lesson for government contractors to proactively anticipate possible tax rate changes and to incorporate clear clauses in their contracts providing for tax variation or reimbursement, so as to safeguard themselves against unforeseen financial exposure.

Case Reference- Sri Ezhumalaiyan Construction Vs State Tax Officer Inspection -1 [W.P. Nos. 7024 & 7032 of 2026 and W.M.P. Nos. 7654, 7655, 7660 & 7662 of 2026, decided on 24-2-2026]

Author- Madhurima Bose