Karnataka Withdraws 3-Year Old Tax Arrears Demand: Impact on Traders
In a major relief for small traders and retailers, the Karnataka government has officially announced that it will not pursue pending 3-year-old tax arrears under the old VAT regime. This decision came after Chief Minister Siddaramaiah’s assurance, prompting trade associations to call off their statewide strike.
Let’s break down what this means for businesses and what to watch out for.
Why Were Traders Protesting?
Over 70 trade bodies across Karnataka were up in arms against:
- Notices demanding recovery of VAT arrears from FY 2017–18 or earlier
- Reopening of assessment files under the pre-GST Value Added Tax (VAT) regime
- Harassment through repeated summons and penalties for “disputed dues”
Government’s Assurance: What’s Been Withdrawn?
Chief Minister Siddaramaiah confirmed on 23 July 2025:
✅ No recovery will be initiated for disputed arrears older than 3 years
This decision aligns with the spirit of ease of doing business, especially for MSMEs.
Legal Angle: Is This Consistent with the Law?
Yes, the move finds support under:
- Past Karnataka High Court rulings discouraging reopening of concluded assessments without strong reasons.
- Principle of ‘Sunset Clauses’ in indirect tax laws – Limit retrospective tax enforcement to a reasonable period.
However, businesses should still retain documentary proof of past filings and payments in case of selective audit scrutiny.
What Does This Mean for You?
If you’re a registered dealer in Karnataka:
- If payments were already made under protest, you may be eligible to file refund claims or appeals.
Expert Tip: How to Avoid Future Compliance Stress
“Always close pending assessments within time limits. Even in the GST era, legacy tax records should be preserved for at least 6 years,” says Anirudh Narayanan, an indirect tax consultant from Bengaluru.
Comparison: VAT vs GST Compliance
| Particulars | VAT (Old Regime) | GST (Current Regime) |
|---|---|---|
| Authority | State Commercial Tax Dept. | GSTN & CBIC |
| Filing Frequency | Monthly/Quarterly | Monthly (GSTR-1, GSTR-3B) |
| Audit Period | Up to 5 years (KVAT) | Typically 3–5 years (GST) |
| Refund Claim Timelines | Longer, manual | 2 years (Sec. 54 CGST Act) |
What’s Next?
- If you’ve received recovery notices recently, wait for the official circular
- Consult your tax practitioner to evaluate past dues and check for refund eligibility
FAQ
Q1. Will VAT cases before 2017 be dropped automatically?
For others, relief will apply post formal notification.
Q2. Can I get refund for arrears already paid?
Yes, if paid under protest. You’ll need proof and a written representation.
Q3. Does this apply to CST (Central Sales Tax) cases too?
The CM’s statement only mentions VAT. CST treatment will depend on further clarification.
Summary
Karnataka CM announces withdrawal of 3-year-old VAT arrears. Traders call off strike. No recovery for FY 2017–18 and before. Official notification awaited.
Need help responding to old VAT notices or claiming refunds?
Let our team at Efiletax handle it for you — from document review to representation.
👉 Get Professional Help Now