MoRTH: Arbitration Ban & GST on Infrastructure Claims in India

• The Ministry of Road Transport and Highways (MoRTH) has eliminated arbitration as the default dispute resolution mechanism for high-value infrastructure contracts, effective January 12, 2026.
• Disputes exceeding Rs 10 crores now funnel through administrative settlements into civil courts, following a Ministry of Finance restriction from June 3, 2024.
• The GST rate for government works contracts increased from 12% to 18% as of September 22, 2025, significantly impacting project economics.
• Arbitral awards for upward price revisions on pre-July 2017 contracts are deemed taxable outward supplies under CGST Act Section 142(2)(a), while liquidated damages are exempt.
• Supreme Court precedent in *Soma Isolux NH One Tollway* supports the sanctity of concluded contracts against administrative overrides, offering a basis to challenge the arbitration restrictions.

Legal professionals and infrastructure stakeholders are now compelled to adopt a multi-disciplinary approach to manage these challenges effectively.

India's infrastructure sector is currently navigating a period of profound change, marked by three significant regulatory shifts over the past 18 months. These developments have fundamentally altered the landscape for high-value project claims, moving away from the previously predictable environment of arbitral tribunals towards a more complex and challenging reality. This new paradigm is characterized by a reliance on non-specialist civil litigation, substantial indirect tax implications, and the potential for significant revenue clawbacks, necessitating a complete overhaul of traditional dispute resolution strategies.

Legal professionals and infrastructure stakeholders are now compelled to adopt a multi-disciplinary approach to manage these challenges effectively. This involves a seamless integration of civil engineering delay analysis with forensic tax adjudication, moving beyond standard legal platitudes and boilerplate pleadings. The convergence of these regulatory changes means that high-value claims are increasingly being decided by civil judges who may lack specialized knowledge of construction metrics, with any resulting recoveries facing considerable taxation under the Goods and Services Tax (GST) regime.

A foundational crisis impacting the sector is the systematic curtailment of arbitration for high-value public procurement disputes. On June 3, 2024, the Ministry of Finance introduced restrictions on arbitration for claims exceeding Rs 10 crores, requiring recorded reasons and approval from a Secretary-level official, or a Managing Director for Central Public Sector Enterprises (CPSEs) and public sector banks (PSBs). This policy was swiftly operationalized by the Ministry of Road Transport and Highways (MoRTH) through a circular issued on January 12, 2026.

The MoRTH circular explicitly eliminated arbitration as the default dispute resolution mechanism for build-operate transfer (BOT), hybrid annuity model (HAM), and engineering, procurement and construction (EPC) contracts. Consequently, high-value disputes are now directed through a tiered administrative settlement process before ultimately being funneled into the civil court machinery. This shift places a greater burden on claimants to present their cases within a judicial system that may not possess the specialized expertise often found in arbitral tribunals, fundamentally altering the India infrastructure dispute resolution strategy.

The Goods and Services Tax (GST) framework has introduced two major fiscal shocks to infrastructure project claims. Firstly, the 56th GST Council meeting brought about a significant increase in the applicable tax rate. Effective September 22, 2025, the concessional 12 percent GST rate previously applied to government works contracts was replaced by the standard 18 percent slab. This six-point increase instantaneously impacts working capital reserves and degrades the projected internal rate of return (IRR) for long-term contracts.

Secondly, the statutory classification of arbitral awards under GST presents a complex challenge, particularly concerning GST on arbitral awards India. Section 142(2)(a) of the Central Goods and Services Tax Act, 2017 (CGST), a transitional provision for contracts predating GST's July 1, 2017 implementation, when read with Section 142(10) for supplies completed thereafter, deems any upward price revision on such legacy contracts, made on or after that date, as a taxable outward supply. Conversely, CBIC Circular No. 178/10/2022-GST provides an exemption for liquidated damages and compensation for breach, clarifying that these payments do not constitute consideration for a supply. Navigating this conceptual distinction is critical for a substantial number of BOT, HAM, and hydro-power concessions that predate 2017, as it determines whether a contractor retains their recovery or surrenders 18 percent to the Revenue Authorities.

The unilateral substitution of dispute resolution clauses by the MoRTH circulars raises significant questions regarding the commercial sanctity of concluded contracts. Legal counsel can leverage binding Supreme Court precedent, specifically the *Soma Isolux NH One Tollway (P) Ltd. v. Harish Kumar Puri* case, which affirmed that a concluded contract binds the parties and that an administrative view of the government cannot override its terms in the absence of a statutory violation. This precedent offers a potential avenue for challenging the MoRTH arbitration ban GST infrastructure claims India.

However, while this jurisprudential evolution provides a legal basis for challenge, it does not immediately pre-empt the practical consequences. Until a constitutional challenge conclusively strikes down the mandate, high-value claims remain subject to the Commercial Courts Act, 2015. This necessitates an urgent revision of Indian public procurement arbitration changes and dispute resolution strategies for legal teams advising on infrastructure projects, adapting to the shift to civil courts with higher evidentiary burdens, and the significant GST exposure on arbitral awards, especially for pre-2017 contracts.

Lawyers advising on Indian infrastructure projects must urgently revise their dispute resolution strategies, adapting to the MoRTH arbitration ban, the shift to civil courts with higher evidentiary burdens, and the significant GST exposure on arbitral awards, especially for pre-2017 contracts. They should also consider leveraging Supreme Court precedents like *Soma Isolux* to challenge the arbitration restrictions.

Source: Original reporting via industry analysis