Shifting the Burden of Indirect Taxes: A Contract Conundrum. Taxes are often categorized as “direct taxes” and “indirect taxes” based on economic theory. Indirect taxes, such as GST, are ultimately borne by consumers despite being charged on suppliers. This means the burden of an indirect tax can be shifted to another party, which is why they are termed “indirect.” Assessees can contractually shift their liability for indirect taxes, a practice common in commercial transactions. GST Registration
Economic Theory vs. Constitutional Law
The Supreme Court of India has held that indirect taxes are “indirect” only in economic theory, not in constitutional law. This means that the nature of the tax remains unchanged even if a person chooses not to contractually shift the tax burden. For instance, a service provider can agree to bear the burden of service tax without passing it on to the recipient. This contractual agreement does not alter the nature of the service tax.
Importance of Contract Terms
The terms of a contract are crucial in determining who bears the ultimate liability for taxes. The introduction of GST has led to numerous contractual disputes due to ambiguities in tax clauses. This article explores select situations to highlight the importance of drafting contracts with clear tax clauses. GST Filing
Tax Clause Dealing Only with Erstwhile Levy
A common scenario is when the tax clause addresses only the previous levies, such as service tax, excise duty, or VAT, without mentioning GST. This raises the question of whether a party has agreed to bear GST simply because they agreed to bear the previous taxes.
Example Clause:
“The above prices are inclusive of excise duty at the rate prevailing on the date of your quotations. If the rate of Excise Duty has since then decreased, you shall charge Excise Duty at the rate prevailing at the time of supply and decrease the price proportionally and inform the office of such decrease if any with detail calculations.”
In Bipson Surgical, it was held that the supplier cannot claim price revision due to the introduction of GST if the contract does not explicitly allow it. Conversely, if a contract allows for recovery of service tax/VAT but is silent on GST, it could be argued that the supplier can recover GST as it replaces the previous taxes.
The answer depends on a holistic interpretation of the contract. If the contract has a change in laws clause, it may allocate the risk and costs of new levies. If silent, litigation may arise due to varying interpretations.
Vague Tax Clauses
Vague tax clauses can lead to disputes about whether they include new levies like GST.
Example 1:
“The Licensee/Licensees shall also duly pay during the continuance of this license all cesses, rates, water charges, taxes and other charges or taxes in respect of the said premises.”
In T. Karthick Raja v. Southern Railway, the Madras High Court held that this clause included GST liability.
Example 2:
“11.2. Payment of taxes/ dues – The Service Provider will be liable for payment of all taxes/duties service tax and other liabilities in respect of the business.”
In IRCTC v. Deepak & Co., the Delhi High Court ruled that this clause did not clarify GST liability, and hence, GST would be payable by IRCTC.
The different interpretations were influenced by Railway Board circulars clarifying GST implications under railway contracts.
No Tax Clause in the Contract
If a contract is silent on tax liability, courts may consider factors like statutory presumptions under GST law and parole evidence to determine the parties’ intent. However, formal contract terms generally prevail over oral arrangements or inconsistent conduct.
Section 64A of the Sale of Goods Act, 1930 states that the burden of tax changes falls on the buyer unless the contract indicates otherwise.
Conclusion
This analysis highlights the importance of clear tax clauses in contracts. With GST rates as high as 28%, parties must explicitly define who bears the tax burden. Key points for contracting parties include:
- Clearly define tax liabilities in the contract.
- Include clauses to account for changes in tax laws.
- Avoid viewing change of law and price variation clauses as boilerplate; tailor them to each transaction.
- Ensure consistency in contract terms and pre-contractual documents to avoid interpretative challenges.
