The first part of this article, published in the May edition of this journal, highlighted instances of contractual disputes arising out of goods and services tax (GST) due to differences in the interpretation of tax clauses or tax treatment in a contract between parties to a contract. This article encapsulates contractual best practices to reduce the chances of such disputes and litigations and arbitrations.
Parties should ensure that contracts contain lucid, mutually agreeable and comprehensive answers to the following questions, to avoid future disputes pertaining to tax:
- Which taxes are to be borne by each party? If the contract price is to include all taxes, does it also include taxes that are statutorily payable by the customer? For example, would customs duty or GST paid on a reverse charge basis by a customer be deducted from future payments to be made to the contractor? If yes, that should be clearly specified along with the necessary method.
- For taxes/cesses such as building or labour cess, which can be the statutory liability of either the customer or the contractor depending on various factors, who bears the responsibility under the contract?
- For taxes that would be reimbursed by the customer, what would be the basis for such reimbursement? What sort of documentary proof would be required?
- For claiming credits that are contingent upon the supplier being compliant with the law, who bears the risk of non-compliance that may, in turn, lead to non-availability of credit and also penal liability?
- Who bears the risk of the tax positions or interpretations adopted, especially on contentious issues?
- If benefits like project imports and export promotion capital goods have been envisaged in the contract, whose responsibility is it to obtain the licenses and permits and undertake the compliances and who suffers in case of failure to obtain such benefit?
- If separate tax treatments for imported supplies of goods and services (forming part of a single contract) are envisaged, does a clear bifurcation of the identity, value and specific treatment for such imported supplies emerge from the contract document?
- Has the scope and extent of the clause dealing with the impact of change in tax laws been documented comprehensively?
- Does the contract clearly indicate whether it includes changes in taxes only for direct transactions between the contracting parties or whether sub-contract level change in taxes would also be covered?
In case of a change in law leading to a reduction in effective GST rates or enhanced input credit to the supplier, does the contract lay down clear guidelines of what will constitute sufficient compliance with anti-profiteering obligations under GST laws that satisfy both parties? Any failure in this regard may lead to one party filing a complaint against the other before the National Anti-profiteering Authority under GST.
Does the contract contain a detailed price schedule specifying the amount and rate of taxes factored on the date of the contract, so that calculating the impact of change in tax laws is easier (especially given the frequent rate changes)?
In the specific context of clauses dealing with change in tax laws, it is pertinent to note that section 64A of the Sale of Goods Act, 1930, provides for indemnification of the affected party on imposition/remission or increase/decrease of customs or excise duty and tax on sale or purchase of goods, subject to a contract to the contrary. In the case of Pearey Lal Bhawan Association (2010), Delhi High Court relied upon section 64A to decide a civil money suit for claim of service tax not originally envisaged under the contract and overruled a specific contractual clause mandating the lessor (the service provider) to bear all the municipal, local and other taxes. By doing so, Delhi High Court effectively extended the concept of section 64A to service transactions as well – this judgment has also been upheld on appeal by the division bench of Delhi High Court. Thus, failing to clearly document the impact of change in tax laws may lead to unforeseen consequences in litigation or arbitration.
While completely eliminating the possibility of contractual disputes arising out of tax controversies would not be possible in today’s dynamic GST (and general taxation) environment, the best practices outlined above should help significantly in its mitigation.
Sudipta Bhattacharjee is a partner and Kanupriya Bhargava is a principal at Advaita Legal.
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