• Dated 24^th March, 2026

Madras High Court Orders Deferment of GST Recovery Where Additional Tax Awaiting Government Reimbursement

Brief Facts

The assessee, a contractor, was engaged in providing services to Government departments under contracts entered into prior to 18.07.2022, when the applicable GST rate was 12%. Subsequently, pursuant to Notification No. 3/2022–Central Tax dated 13.07.2022, the GST rate on such services was increased to 18% with effect from 18.07.2022. During execution of the ongoing contracts, the assessee continued to raise invoices, while the Government departments paid GST only at 12%. The assessing authority passed orders demanding differential tax of 6% along with applicable consequences. The assessee challenged the assessment orders before the High Court, seeking quashing of the demand and direction upon the Government authorities to pay the differential GST.

Assessee's Contention

The assessee contended that the contracts were executed when the GST rate was 12% and pricing was based on the said rate. It was argued that the subsequent increase in GST constituted a change in law, and the burden of the additional 6% should be borne by the Government departments, especially since they had acknowledged the issue and initiated steps for reimbursement. The assessee further submitted that recovery proceedings ought not to be enforced until reimbursement was effected.

Department's Contention

The department contended that after 18.07.2022, the applicable statutory rate of GST was 18%, and the assessee was legally bound to discharge tax at the revised rate. It was argued that tax liability under the statute is independent of contractual arrangements, and therefore the demand of differential tax was valid and enforceable.

Court's Decision

The High Court held that the levy of GST at 18% in respect of supplies made after 18.07.2022 was valid and in accordance with the statutory notification, and therefore the demand of differential tax could not be set aside. However, considering that the Government authorities had undertaken to seek reimbursement of the additional 6% GST, the Court directed that recovery of the differential tax be kept in abeyance. The Court further directed the concerned Government departments to expedite the process of reimbursement within a period of six months and restrained coercive action against the assessee in the meantime. The assessee was directed to comply with other undisputed tax liabilities.

BTA Comment

This ruling highlights the distinction between statutory tax liability and contractual allocation of tax burden. While affirming that tax must be paid in accordance with the law as amended, the Court balanced equities by protecting the contractor from immediate recovery where the Government had accepted responsibility for reimbursement. The decision ensures that contractors are not unduly prejudiced due to mid-contract tax rate changes, while simultaneously safeguarding the interests of revenue.

Case Ref - M/s Sri Ezhumalaiyan Construction v. State Tax Officer & Ors., WP Nos. 7024 & 7032 of 2026, decided on 24.02.2026 (Madras High Court)

Author-Aindrila Ghosh

Edited by-Sneha Nandi