GST Claims Between Builder and Buyer: Can They Be Raised in Arbitration?

In the real estate sector, disputes between builders and buyers often revolve around payments, possession delays, and additional charges like Goods and Services Tax (GST). A common question arises: Can GST claims between builder and buyer be raised in arbitration? This issue pits contractual obligations against the sovereign nature of taxation, raising questions about arbitrability under Indian law.

This blog post delves into the legal nuances, drawing from Supreme Court precedents and recent judgments. While arbitration offers a swift resolution for commercial disputes, tax-related claims may fall outside its scope. Note: This is general information, not specific legal advice. Consult a qualified lawyer for your situation.

Understanding GST Claims in Builder-Buyer Agreements

Builder-buyer agreements typically include clauses on tax liabilities, where builders charge GST on construction services and seek reimbursement from buyers. Disputes emerge when buyers challenge these charges, alleging incorrect application or contractual breaches.

For instance, invoices may include 18% GST, with builders claiming recovery under the agreement. Buyers might argue these are not payable or miscalculated. The key question is whether such claims trigger arbitration under standard clauses in Builder-Buyer Agreements (BBAs).

Recent cases highlight that while BBAs often mandate arbitration for all disputes arising out of the agreement, tax claims complicate this. Courts distinguish between pure tax challenges (non-arbitrable) and contractual interpretations (potentially arbitrable).

Spectrum Power Generation Limited vs Gail (India) Limited - Delhi (2022)

Arbitrability of Tax Disputes: Sovereign Functions at Play

Taxation is a sovereign function, generally non-arbitrable. The Supreme Court in Vidya Drolia v. Durga Trading Corporation (2021) clarified that disputes involving inalienable sovereign rights, like taxation, cannot be delegated to private arbitrators. 2025 0 Supreme(Mad) 2209

• Core Principle: Sovereign functions such as tax assessments or statutory interpretations are non-arbitrable unless statutes explicitly allow it.
• Application to GST: GST claims questioning the legality, validity, or assessment of tax fall into this category. As a fiscal levy, GST embodies state monopoly rights.

The Court emphasized: sovereign functions—such as taxation—are generally non-arbitrable because they are inalienable, non-delegable. 2025 0 Supreme(Mad) 2209

In builder-buyer contexts, if a claim challenges the GST levy itself (e.g., rate validity), arbitration is typically barred. However, if it's about contractual reimbursement obligations, it may proceed.

Contractual Clauses and Scope of Arbitration in Real Estate

Most BBAs contain broad arbitration clauses. For example, Clause 29 or 30 in some agreements states: all disputes arising out of the said Agreement shall be referred to Arbitration. 2024 Supreme(Online)(DEL) 8088

Yet, courts scrutinize scope:- Arbitrable: Disputes over whether the contract mandates GST reimbursement, invoice interpretation, or performance.- Non-Arbitrable: Direct challenges to tax lawfulness or assessments.

In one case, the court noted GST disputes could be commercial if tied to contract terms, not sovereign power.

Spectrum Power Generation Limited vs Gail (India) Limited - Delhi (2022)

Builder-specific insights from other rulings:- Arbitration clauses do not bind non-signatories like agents. 2024 Supreme(Online)(DEL) 8088- Consumer forums retain jurisdiction despite arbitration clauses, especially for possession delays. 2025 Supreme(Online)(SCDRC) 127 2019 0 Supreme(Mad) 2369

Consumer Protection Override in Builder-Buyer Disputes

Real estate buyers often invoke Consumer Protection Act remedies for deficiencies like delayed possession. Courts have ruled that arbitration clauses cannot circumscribe consumer fora jurisdiction.

The Supreme Court held: an Arbitration Clause in the afore-stated kind of Agreements between the Complainants and the Builder cannot circumscribe the jurisdiction of a Consumer Fora, notwithstanding the amendments made to Section 8 of the Arbitration Act. 2019 0 Supreme(Mad) 1911 2018 0 Supreme(SC) 1235

Key points:- Buyers qualify as consumers if not for resale profit.

DLF Homes Panchkula Pvt. Ltd. VS Himanshu Arora

For GST claims, if framed as a service deficiency (e.g., unjust GST charging), consumer courts may handle them, bypassing arbitration.

Jurisdictional and Procedural Hurdles

Jurisdiction often hinges on claim value, excluding interest or future GST.

Simentech India Private Limited VS Bharat Heavy Electricals Limited - Current Civil Cases (2024)

In Sanjeev Narula, J., disputes on tax legitimacy were deemed non-arbitrable.

Simentech India Private Limited VS Bharat Heavy Electricals Limited - Current Civil Cases (2024)

Procedural notes:- Section 11 petitions limited to arbitration agreement existence and prima facie case. 2024 Supreme(Online)(DEL) 8088- Group of Companies Doctrine may bind non-signatories, but not always in builder cases. 2024 Supreme(Online)(DEL) 8088

Summary of Legal Position

| Aspect | Position | Key Source ||--------|----------|------------|| Tax Disputes Arbitrability | Non-arbitrable if sovereign (e.g., GST assessment) | Vidya Drolia2025 0 Supreme(Mad) 2209 || Contractual GST Reimbursement | Arbitrable if commercial/contract interpretation |

Spectrum Power Generation Limited vs Gail (India) Limited - Delhi (2022)

Simentech India Private Limited VS Bharat Heavy Electricals Limited - Current Civil Cases (2024)

Conclusions and Key Takeaways

GST claims between builders and buyers cannot always be raised in arbitration. Pure tax challenges are typically non-arbitrable due to sovereign functions, but contractual disputes over reimbursement may qualify. In real estate, consumer protection often trumps arbitration.

Recommendations:- Draft clear clauses excluding/including tax issues.- Opt for consumer forums early if applicable.- Assess if dispute is contractual vs. statutory.

Clear drafting and early legal consultation can prevent escalation. Stay informed on evolving jurisprudence for effective resolution.

Sources:

Spectrum Power Generation Limited vs Gail (India) Limited - Delhi (2022)