MoRTH Arbitration Ban, Evidence and GST in Infrastructure Claims

An analysis of the changing legal and tax landscape for high-value infrastructure disputes in India, examining the MoRTH arbitration restrictions, evidentiary burdens in civil courts, and GST exposure on arbitral awards.

Three regulatory shocks have converged on India’s infrastructure sector inside 18 months, fundamentally rewriting the rules of engagement for project claims. The era of the comfortable, predictable Arbitral Tribunal is effectively over. In its place, a brutal new reality has emerged — one characterised by non-specialist civil litigation, indirect tax wipeouts, and lethal revenue clawbacks.

Standard legal platitudes, boilerplate pleadings, and reliance on conventional commercial counsel will result in high-value claims being decided by Civil Judges who do not speak the language of construction metrics, only for the remnants to be taxed into oblivion by the Goods and Services Tax (GST) Department.

To navigate this convergence, general counsels (GCs) and infrastructure stakeholders require a multi-disciplinary legal strategy — one that seamlessly synthesises civil engineering delay analysis with forensic tax adjudication.

The statutory perfect storm

The foundational crisis currently paralysing the sector is the systematic dismantling of arbitration for high-value public procurement disputes. On 3 June 2024, the Ministry of Finance restricted arbitration above Rs 10 crores absent recorded reasons and Secretary-level [or Managing Director-level, for Central Public Sector Enterprises (CPSEs) and public sector banks (PSBs)] approval.¹ The Ministry of Road Transport and Highways (MoRTH) rapidly operationalised this policy via circular on 12 January 2026, explicitly eradicating arbitration as the default mechanism across build-operate transfer (BOT), hybrid annuity model (HAM), and engineering, procurement and construction (EPC) contracts.² High-value disputes are now funnelled into a tiered administrative settlement process, and ultimately, straight into the civil court machinery.

Simultaneously, the 56th GST Council meeting catalysed a massive fiscal shock by collapsing India’s multi-slab structure. Effective 22 September 2025, the concessional 12 per cent GST rate for government works contracts was substituted with the standard 18 per cent slab. This flat six-point increase instantaneously evaporates working capital reserves and degrades the projected internal rate of return (IRR) on long-term contracts.

Finally, the most insidious threat lies in the statutory classification of the eventual award. Section 142(2)(a), Central Goods and Services Tax Act, 2017 (CGST) — a transitional provision confined to contracts predating GST’s 1 July 2017 “appointed day”, read with the Section 142(10) backstop for supplies completed thereafter — deems any upward price revision on such a legacy contract, made on or after that date, a taxable outward supply. Conversely, CBIC Circular No. 178/10/2022-GST shields liquidated damages and compensation for breach from GST, establishing that such payments are not consideration for a supply.³ A meaningful tail of BOT, HAM, and hydro-power concessions still predates 2017, so navigating the conceptual void between these two provisions continues to dictate whether a contractor keeps their recovery or surrenders 18 per cent back to the Revenue Authorities.

The jurisprudential evolution

The MoRTH circular’s unilateral substitution of dispute resolution clauses violates the commercial sanctity of concluded contracts. GCs can rely on binding the Supreme Court precedent, specifically in Soma Isolux NH One Tollway (P) Ltd. v. Harish Kumar Puri⁴, which holds that a concluded contract binds the parties and that the government’s administrative view cannot override its terms absent statutory violation. What the precedent cannot do is pre-empt the practical consequence: until a constitutional challenge conclusively strikes down the mandate, high-value claims remain trapped in the Commercial Courts Act, 2015 apparatus — which is where the evidentiary burden below actually bites.

Before these Civil Judges, Indian jurisprudence on concurrent delay remains precarious. In Secretary to Govt. v. SPL Infrastructure (P) Ltd.⁵, the Madras High Court considered the English Malmaison approach but distinguished it on the facts, finding the delays sequential rather than concurrent. More recently, in MMRDA v. Mumbai Metro One (P) Ltd.⁶, the Bombay High Court rejected Mumbai Metropolitan Region Development Authority (MMRDA)’s argument that delay entitled the concessionaire only to a time extension and not monetary compensation — yet struck down Rs 248 crores of the very same award for want of evidence, holding that “guesswork cannot be a shortcut for the production of evidence”. Civil courts are, in short, exacting on both delay attribution and quantum proof — a dual burden standard commercial pleadings are rarely built to meet.

On the tax front, the lethal turning point was crystallised in Karam Chand Thapar & Bros (Coal Sales) Ltd., In re⁷. Of a Rs 94.56 crores settlement on 1996 hydro-power contract, the Authority declined to treat the award as one transaction and examined each claim on its substance. The single largest head — a Rs 69.38 crores claim tied to the contract’s own price-variation clause — was held to be consideration for supply and taxed at 18 per cent under Section 142(2)(a): A Rs 12.5 crores hit on that claim alone. The remaining heads, arising from site-access failures and forced material substitutions, were left untouched as liquidated damages under Circular 178. The lesson is not that counsel mislabeled the claim; it is that a contractual escalation clause carries its GST character into the award no matter how the settlement is later framed.

The blueprint for survival

The current ecosystem is actively weaponised against standard dispute strategies. While Commercial Court Judges are legally astute, they are rarely equipped to dissect the hyper-technical realities of concurrent delays, as-planned versus as-built methodologies, or S-curve deviations. Standard commercial lawyers routinely fail to articulate which specific delay jurisprudence should apply and lack the engineering capability to map these metrics into a bulletproof, visually digestible format. Without a flawless evidentiary chain-of-custody, critical time impact analyses are dismissed as hearsay under the Evidence Act, 1872.

Worse, when these litigators do succeed, they often inadvertently sabotage the financial recovery through conventional contract pleadings. A lawyer trained purely in contract law will naturally draft pleadings claiming “compensation for additional work” or “price adjustments” because it is factually easier to prove under standard evidentiary rules. By taking this path of least resistance, counsel transforms the claim into an “outward supply” or “upward revision” under Section 142(2)(a), acting as an unwitting tax Collector for the State.

This siloed approach — delegating critical path engineering to external quantum experts, focusing solely on contract law at trial, and ignoring indirect tax implications until the award lands — is a recipe for absolute financial ruin. Resolving this requires someone who can hold the engineering and the tax analysis in the same head, at the same time.

The way forward

To protect the balance sheet and salvage project IRRs, GCs need a different counsel-selection framework for this category of dispute. The traditional legal playbook is not merely outdated; it is actively dangerous to the financial health of the contractor.

1. Synthesise engineering and evidence in-house: Stop outsourcing delay analysis to testifying experts whose reports fail under brutal cross-examination. Claims must be built by legal counsel with an intrinsic understanding of civil engineering, capable of mathematically mapping S-curve deviations directly to the employer’s breaches to defeat the Malmaison concurrent delay trap. The engineering must be translated flawlessly into the language of civil evidence.

2. Pre-classify claims against Circular 178: Every head of claim — delay compensation, prolongation cost, escalation — must be classified and pleaded against the Circular 178 test before the first hearing. As the case of Karam Chand Thapar⁸ shows, this is a claim-by-claim exercise, not a blanket label: heads sounding in genuine breach compensation under Section 73, Contract Act, 1872 stay outside GST, but any head traceable to a contractual price-variation or escalation clause carries its “consideration for supply” character into the award regardless of how it is pleaded.

The era of hiring a standard commercial litigator, retaining a separate external quantum expert, and consulting a separate tax advisor independently is proving costly. High-value infrastructure disputes increasingly demand counsel who can read engineering critical paths and revenue exposure together — a combination most mandates still split across three separate retainers. Bridging that gap is what now stands between a nominal arbitral win and a recovery that survives the GST Department.