Impact of GST on Contract Price Revisions for Existing Agreements

In the realm of ongoing business operations, particularly concerning contractual agreements, price revisions are a common occurrence. Many contracts incorporate an escalation clause, allowing sellers to adjust the contract price if material costs increase. With the Goods and Services Tax (GST) implemented on July 1st, businesses have concerns about how this new tax regime influences contract price adjustments.

How Old Contracts Are Affected by Price Revisions Post-GST

When Contract Price Increases After Revision

Suppose a dealer entered into a contract before GST came into effect, and subsequently, the prices of goods or services rise after the GST implementation date. In such a scenario, the seller is required to issue a supplementary invoice or debit note within 30 days of the price adjustment. This supplementary document is considered to be issued under the GST framework.

When Contract Price Decreases After Revision

Conversely, if a dealer initiated a contract before GST implementation, and the prices of goods or services decrease after the GST go-live date, the seller must issue a credit note within 30 days. This credit note will also be treated as issued under GST.

Note: The seller can only reduce their tax liability if the buyer correspondingly reduces the input tax credit they have claimed. This aligns with the principle of unjust enrichment, meaning a supplier cannot reduce their output tax liability if the tax burden has already been transferred to another party. Unjust enrichment refers to the concept where no individual should unfairly benefit at the expense of another.

Let's address some common questions regarding contract revisions under GST:

• If goods or services are supplied after GST, but the contract was made under the previous tax law, which tax applies? All supplies executed after the GST implementation date are subject to GST, regardless of when the contract was originally signed.
• What if payment for a sale was received in advance under the old law, and tax was paid, but delivery occurs post-GST? Will GST also be applicable? GST will not be levied on the supply of goods or services made after July 1st if the payment was received before GST implementation and the relevant duty or tax was already paid under the previous tax regime.

Note: If supplementary invoices or credit notes are issued to unregistered individuals, the condition regarding the reduction of input tax credit does not apply. Let's explore this with examples.

Scenario 1: Price Increase Example

Mr. B and Mr. S entered a contract on June 20th, 2017, for Mr. S to sell 1000 kgs of cement for Rs. 1,00,000. On July 10th, Mr. S increased the contract price to Rs. 1,10,000. How should this be handled?

Mr. S must issue a supplementary invoice or a debit note to Mr. B by August 10th.

Will GST apply to the additional Rs. 10,000?

Yes, since the additional consideration was not received, and no taxes were paid previously on this amount, GST will apply to the entire revised contract value of Rs. 1,10,000.

What if Mr. B had paid the initial Rs. 1,00,000 in advance in June 2017, and Mr. S had already deposited the VAT collected?

In this case, GST would only be applicable to the additional Rs. 10,000.

Scenario 2: Price Decrease Example

Considering the same initial contract, if Mr. S reduces the price to Rs. 80,000, what is the procedure?

Mr. S will issue a credit note to Mr. B for Rs. 20,000.

Can Mr. S reduce his tax liability (e.g., by Rs. 1,000)?

Mr. S can only reduce his tax liability if Mr. B reduces his input tax credit by the corresponding amount (Rs. 1,000).

What if Mr. B had already made an advance payment?

Mr. S could amend his VAT return even after GST implementation to claim a refund of Rs. 1,000. Simultaneously, Mr. B would need to reverse Rs. 1,000 from the input tax credit carried forward to GST.

Scenario 3: Unregistered Buyer

If Mr. B is an unregistered buyer, how are price reductions handled?

Mr. S will not be able to reduce his tax liability unless he demonstrates that he has passed on the benefit of the price reduction to Mr. B. This again reinforces the principle of unjust enrichment, preventing anyone from unjustly benefiting at another's expense.