Introduce indemnity clauses with suppliers on tax compliance: Expert

Begin by examining if your contract price is tax extra or inclusive of taxes, writes Bhattacharjee

A lot has been written about various aspects of transitioning to GST, but sparse little about contractual caution points. Businesses may refer to the following key aspects in this regard and then negotiate/enter into suitable contracts, capturing the requisite amendments:

1) ‘Change in law’

• Begin by examining if your contract price is ‘tax extra’ or ‘inclusive of taxes’

• If it is tax-inclusive, please examine if your ‘change-in-law-clause’ enables tracking the impact of this change across the supply chain? Simply put, if your service provider claims that the tax rate has gone up from 15 per cent service tax to 18 per cent GST and you should pay three per cent extra, does your contract permit you to ask: “15 per cent was on Rs 100. But, now owing to GST, your Rs 100 may have gone down to Rs 95. Before I pay the extra three per cent, you need to pass on the benefit of this reduction from Rs 100”

• If not, resort may be taken to anti-profiteering provision under the GST and Section 64A of the ‘Sale of Goods Act’ (for contracts of supply of goods)

• Even if it is ‘tax extra’, the benefit of commensurate reduction in price ought to be demanded on the basis of the anti-profiteering provision

2) Transfer of title/ownership clauses: Ownership clauses today are often predicated upon tax arbitrages under the extant VAT/CST regime (like E1/E2 or ‘in-transit’ sale). Now that the tax arbitrage is gone, we ought to agree upon a transfer of title clause that makes sense commercially

3) Capturing specific indemnities and obligations relating to tax compliances: Given the concept of credit mismatch under GST, companies ought to introduce specific indemnity clauses obligating the supplier of goods/service to comply with all procedural requirements so as to enable the recipient to avail input tax credit in a timely manner

4) Bid evaluation criteria: Criteria of ‘GST Compliance rating’ may need to be introduced

5) Single contract vs multiple contracts: There are several rate slabs and classifications under GST along with ambiguities about ‘composite’ and ‘mixed’ supplies. It should come as no surprise that the debate of ‘single-versus-multiple’ contracts will transition to GST.

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The writer is partner – tax controversy management and contract documentation, Advaita Legal