GST Demand Upheld but Recovery Deferred Due to Pending Reimbursement from Government

Sri Ezhumalaiyan Construction Vs State Tax Officer Inspection -1 (Madras High Court)

In Sri Ezhumalaiyan Construction vs State Tax Officer Inspection-1, the Madras High Court considered writ petitions challenging assessment orders dated 16.12.2025 for the tax periods 2022–2023 and 2023–2024, which demanded differential tax at 6% following an increase in GST rates.

The petitioner had entered into agreements with certain government-related entities prior to the issuance of Notification No. 3/2022, under which the applicable GST rate for services to government entities was 12%. Subsequently, with effect from 18.07.2022, the tax rate was increased to 18%, resulting in a differential tax liability of 6%. The concerned entities (respondents 6 to 8) acknowledged this change and issued communications stating that they had taken steps with the Government of Tamil Nadu to secure reimbursement of the additional tax amount.

The Court held that the petitioner’s challenge to the levy of 18% GST could not be sustained, as the authorities were bound to apply the revised rate in accordance with the notification for services rendered after 18.07.2022. Therefore, the demand of tax at 18% was valid in law.

However, the Court noted that the petitioner’s claim for reimbursement of the differential 6% tax was supported by communications from the contracting government entities, which had undertaken to obtain approval and funds for payment of the increased tax component. The Court referred to its earlier decisions where, in similar circumstances, directions were issued to ensure reimbursement by the government authorities and to prevent coercive recovery against contractors.

Following this reasoning, the Court directed respondents 6 to 8 to pursue the matter with the Government for reimbursement of the differential tax arising from the rate change. This process was to be completed within six months from the date of receipt of the order.

Pending such reimbursement, the Court ordered that recovery of the differential tax relating to “Defect No.1” in the impugned assessment orders be kept in abeyance. At the same time, the Court clarified that other confirmed demands in the assessment orders, if unpaid, must be settled by the petitioner along with applicable interest and other dues.

The writ petitions were disposed of with these directions, and no costs were awarded. The Court thus balanced the statutory obligation to pay tax at the revised rate with the practical issue of reimbursement arising from pre-existing contracts with government entities.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

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%

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 P.(MD).No.9095 & 13587 of 2023 on 25.06.2024 following the order dated 22.09.2023 in W.P.No.22771 of 2023 in Vediappan Vs. The Secretary to Government, Commercial Taxes and Registration Department and others, 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.

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 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.