Gujarat AAR Rules: No GST on Arbitration Interest & Costs from Pre‑GST Contracts

🔍 Introduction

On July 6, 2025, the Gujarat Authority for Advance Ruling (AAR) issued a significant ruling impacting contractors and businesses involved in pre‑GST contracts. In In re Shoft Shipyard P Ltd, the AAR clarified that interest and arbitration costs awarded under arbitration for disputes arising from contracts executed before July 1, 2017, are not subject to GST. This ruling brings welcome clarity and financial relief to businesses navigating claims on past contracts.

1. 🧩 Case Background

• Contract timeline: Shipbuilding contract awarded in 2009 (pre‑GST).

• Disputed claim: ₹1.39 crore withheld by the client in 2010, written off in FY2012–13.

• Arbitration process: Initiated in 2014; award delivered in 2017.

• Payments received: Principal in March 2020; interest (₹1.18 crore) and arbitration costs (₹1.75 lakh) received in 2024.

2. 📜 Legal Framework & Key Sections

• Pre‑GST supply: The original services were completed and invoiced before July 1, 2017, making them outside the GST timeline.

• Section 142 (Transitional provisions) ensures contracts taxed under VAT or service tax before GST remain outside GST jurisdiction. dpncglobal.com

• Circular 178/10/2022‑GST distinguishes liquidated damages from penalties; only those in original contracts as contractual “consideration” attract GST.

3. 🔍 AAR Analysis and Ruling

Pre‑GST Supply

• Since supply and invoicing were pre‑GST, Sections 12 and 13 of CGST Act (which address time-of-supply including interest) are not applicable. 

Interest and Arbitration Costs

• No contractual provision for interest or arbitration costs existed in the original 2009 contract.

• AAR concluded these amounts were not “consideration for supply” under Section 2(31) of CGST. 

Conclusion

• GST is not applicable on amounts received as interest and arbitration, since:

  • The underlying contract was pre‑GST;

  • There was no contractual clause linking these costs to supply;

  • Transitional provisions under Section 142 prevent GST imposition.

4. 🛠️ Practical Implications & Tips

If you're managing pre‑GST contracts and arbitration claims:

1. Review your contract: Ensure no clauses claim interest/penalty or arbitration costs.

2. Track payment dates: If both service and invoicing were pre‑GST, subsequent payments likely escape GST.

3. Use transitional provisions: Section 142 protects pre‑GST claims—understand whether VAT/ST covered original supply.

4. Document with care: Maintain clear records of arbitration awards, invoices, and payments.

5. 📊 Comparative Snapshot

Component	Pre-GST Contract	Post-GST Contract
Original supply	Exempt/VAT/ST	GST
Interest payable	Likely exempt	Taxable under Sec 12(6)
Arbitration costs	Exempt	Taxable (RCM)
Time of supply	Not applicable	Determined under GST axe

6. 🌍 Broader Relevance

This AAR ruling aligns with other transitional decisions by AARs (Telangana, Maharashtra), which exempted arbitral awards from GST when the original contract pre-dated GST. 

7. ✅ Conclusion

The Gujarat AAR’s ruling in the Shoft Shipyard P Ltd case brings clarity and certainty to contractors and businesses dealing with legacy contracts. By ruling out GST on arbitration-related receipts from pre-GST agreements—based on contractual scope, timing, and transitional law—the decision safeguards interests and reduces compliance burdens. For Manika TaxWise readers, the takeaway is clear: maintain strong contract records, understand GST timelines, and confidently claim tax exemptions for legacy arbitration outcomes.

FAQs

Q1: What is a pre‑GST contract?
Contracts executed and invoiced before July 1, 2017.

Q2: Why aren't interest and arbitration costs taxed?
Because the supply was pre‑GST, and no contractual clause made these costs part of the original consideration, they fall outside GST liability 

Q3: Does Section 142 of CGST protect me?
Yes. It exempts transactions under previous tax regimes from GST.

Q4: What if interest or arbitration was in the original contract?
Then those costs could be treated as taxable consideration under Sections 12(6) or 13(6) of CGST.

Q5: Can this ruling be applied to other states?
While only binding for Gujarat, similar rulings nationwide support its logic—consult your local AAR judgments.

Q6: How do we document to ensure our claim?
Keep dated copies of contracts, arbitration awards, invoices, and bank statements for a clear audit trail.

🏷️ Keywords

• GST on arbitration costs

• Pre-GST contract interest GST

• Gujarat AAR Shoft Shipyard

• GST transitional provisions

• GST on arbitration claim