While drafting supply contracts or long term supply
contracts, the clause that is often overlooked is the price clause or the tax
clause. The price clause does not generally set out whether the price is
inclusive or exclusive of taxes. Tax clauses in an agreement deal
with deductions in the form of TDS and fails to take into account the
indirect taxes payable on the supply of goods or services.
With the Goods and Services Tax being implemented,
companies are revisiting their existing contracts to modify the price clause or
the tax clause to factor the increase in rate of taxes. While this is
understandable and advisable when the parties are willing to re
- negotiate the price.
However, in a scenario where contracting party is
not willing to re - negotiate the terms of the contract, is there any
protection available for such suppliers?
It is not known to many that the remedy is
available in Sale of Goods Act, 1930 (“Sale of Goods Act” or “Act”) . The Act
provides cover to seller in the course of increase in rate of tax. Section 64A
of the Sale of Goods Act is the relevant provision which is extracted below:
64A. In contracts
of sale, amount of increased or decreased taxes to be added or deducted
1.
Unless a different intention
appears from the terms of the contract, in the event of any tax of the nature
described in sub-section (2) being imposed, increased, decreased or remitted in
respect of any goods after the making of any contract for the sale or purchase
of such goods without stipulations as to the payment of tax where tax was not
chargeable at the time of the making of the contract, or for the sale or
purchase of such good tax- paid where tax was chargeable at that time.-
a.
if such imposition or increase so
takes effect that the tax or increased tax, as the case may be, or any part of
such tax is paid or is payable, the seller may add so much to the contract
price as will be equivalent to the amount paid or payable in respect of such
tax or increase of tax, and he shall be entitled to be paid and to sue for and
recover such addition, and
b.
if such decrease or remission so
takes effect that the decreased tax only, or no tax, as the case may be, is
paid or is payable, the buyer made deduct so much from the contract price as
will be equivalent to the decrease of tax or remitted tax, and he shall not be
liable to pay, or be sued for, or in respect of, such deduction.
2.
The provisions of sub-section (1)
apply to the following taxes, namely:-
a.
any duty of customs or excise on
goods.
b.
any tax on the sale or purchase
of goods.
The above provision
provides that in case of increase in the rate of excise duty or customs duty or
sales tax (or VAT). The seller has the option to increase the contract price to
factor the increase in rate of tax.
Similarly, in the case
of decrease in rate of tax, the Sale of Goods Act provides that the buyer may
deduct the decrease in tax amount from the payments due to the seller.
In both the scenarios,
the statute gives protection to the seller and buyer from being sued as such
deduction will not be considered as breach of contract by the supplier.
Concluding thoughts
It
may be noted that the statutory cover is available only when the agreement
is silent on increase in rate of taxes and who will bear the incidence of such
taxes.
Further,
the Act only contemplates increase or decrease in rate of customs duty, excise
duty and VAT. Therefore, any increase in rate of service tax will not be
covered under this Act and the supplier of service has no statutory remedy in
such situations.
Since,
Section 64A(2) of the Act specifically deals with increase in rate of customs
duty, excise duty and sales tax, will the provision become redundant when the
taxes are subsumed in GST.
On
the contra, can we take resort under Section 64A(2)(b) which covers "any tax on the sale or purchase of
goods". Therefore, will it be possible to argue that when the under GST is
for sale or purchase of goods, the supplier will be covered under the said
provision if the buyer refuses to compensate the buyer for the increase in rate
of taxes.
A suitable amendment
clarifying the above anomalies will help the industry.
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