GST's unfinished agenda: Dealing with contractual price adjustments

Notwithstanding the fact that it has been more than a year since the GST legislation triggered and changed the indirect tax landscape of the country, there is still unfinished legislative agenda towards making India a business-friendly destination. Party-autonomy, which is at the core of contractual bargain, is not just left unaddressed but is in fact muddled on account of inconsistent treatment in GST, necessitating urgent legislative intervention.

Given the vagaries of business, especially with transactions involving long-gestation periods, commercial contracts are generally endowed with price-adjustment clauses. These clauses ensure that contingencies impacting the price-bargain of the parties are pre-addressed. To the extent that there is a mutual agreement among the parties foreseeing such contingencies and providing for them in advance, judicial opinion reveals that these clauses also double-up as dispute mitigation measures. Traditionally, such clauses have been accommodated by the indirect tax laws insofar as these clauses permit identification of the respective obligation of the parties in the event of a change in tax-incidence.

Section 64-A of the Sale of Goods Act, 1930, is the sole statutory provision which gives legal recognition to and also accommodates such price-adjustment clauses. It provides that an increase in tax or introduction of a new tax that entitles the supplier to recover such increased incidence from the receiver and, vice versa, a reduction in tax-incidence would be to the benefit of the receiver.

The provision, however, permits a contract to the contrary. In other words, it allows the parties to contract out of the law by providing that an increased tax incidence would have to be borne by the supplier and vice versa. The legislative mandate flowing from this provision has been judicially endorsed and law reports are replete with decisions giving effect to the contractual agreement between the parties regarding bearing of tax incidence. The decision of the Supreme Court in the Numaligarh Refinery case (2007), for illustration, underscores the essence of a ‘firm-price’, i.e. one which does not vary on account of tax fluctuations.

Issues, however, arise on account of the inherent limitation of this legal provision; it applies to only tax-fluctuations on account of excise duties, customs and sales taxes. Put otherwise, the law fails to acknowledge that change in tax-incidence can also be driven by tax on services. This is ironical given that ‘service tax’ was in vogue for more than two decades before being subsumed in GST recently. It is only on account of the judicial endorsement that the provision was extended in its spirit even to service tax driven changes in tax-incidence. The Supreme Court in Rashtriya Ispat (2012) declared that “there was nothing in law” that prevented parties to shift the incidence of service tax. Thus, a legislative vacuum was filled.

Tarun Jain is advocate, Supreme Court, and author of Goods and Services Tax: Constitutional Law and Policy

The position is far from clear under GST. Despite the myriad legislative changes on account of GST, Section 64-A continues abated as it has not been amended. However, the GST laws carry an ‘anti-profiteering’ obligation for all suppliers to pass on any tax reduction to the buyer by way of ‘commensurate reduction in prices’. The detailed regulations issued by the government entail severe penal consequences for failure to abide by this mandate. This reveals a head-on clash between the existing and GST laws. To illustrate, while Section 64-A permits the parties to agree that the supplier can retain any benefit on account of tax reduction on the goods being sold, the anti-profiteering obligation under GST does not allow so.

It has been stressed that the objective underlying the anti-profiteering provision is consumer welfare. In such a scenario, its application should have been confined to B2C supplies. However, there is no exclusion for B2B supplies. Thus, besides the legislative inconsistency, the GST law impinges upon party-autonomy and business decision-making which has hitherto taken refuse under Section 64-A to insulate against tax-fluctuations. Given that there are frequent changes in the GST rates, the consequent business discomfort owing to the constant revisiting of prices cannot be over-emphasised.

The aforesaid reveals that a clear case for legislative intervention is made out. The tax-simplification exercise initiated by the GST laws should be considered as only a starting point towards designing the policies for a business-friendly nation. For a start, B2B supplies can be carved out from the scope of the anti-profiteering obligation under GST. Additionally, a clear legislative framework has to be provided to accommodate and comprehensively address the scope of party-autonomy regarding price-adjustments on account of tax-fluctuations. 

The writer is advocate, Supreme Court,  and author of Goods and Services Tax: Constitutional Law and Policy