What Happens if Contract Price is Revised after GST Implementation?

In an ongoing business, especially when dealing with contracts, contract price revision is very common. Many contracts often have an escalation clause which permits the seller to increase the contract price when the cost of materials increase. With GST getting implemented on 1st July, businesses are worried how GST will affect the price revision of contracts.

What Happens to Old Contracts if Contract Price is Revised After GST?

Contract Price Increased after Revision

Let’s assume a dealer has entered into a contract before GST implementation, and post the go-live date the prices of goods/services are increased. Then the seller will have to issue a supplementary invoice or debit note within 30 days of price revision. This supplementary invoice/debit note will be assumed to be made under GST.

Contract Price Decreased After Revision

Let’s assume a dealer has entered into a contract before GST implementation, and post the go-live date the prices of goods/services are decreased. Then a credit note will be issued by the seller within 30 days. This credit note will be assumed to be made under GST.

Note: The seller can reduce his tax liability only if the buyer has reduced the input tax credit claimed by the same amount. Thus, it follows that the principle of unjust enrichment or reduction in output tax liability of the supplier will not be allowed if the incidence of tax has been passed on to another person. The concept of unjust enrichment is that no one can enjoy gains unjustly at the expense of another. Let’s also look at some of the other queries that people might have about contract revision.

If any goods or services are supplied after GST, in oursuance of a contract entered under the earlier law, which tax will be payable?

All supplies made after the appointed day will be liable to GST irrespective of contract date.

What happens if consideration for any sale was received in advance during the earlier law and tax on it was paid, will GST also become payable where the delivery is made post GST implementation?

GST will not be payable on the supply of goods/services made after 1st July if the consideration for it has been received before GST implementation and the duty/ tax has already been paid under the earlier law.

Note: If supplementary invoice/credit notes are issued to unregistered persons then the condition of reducing input tax credit will not be applicable.   Let us understand this further through examples.

Case 1

Mr. B had entered into a contract with Mr. S on the 20th June 2017, requesting Mr. S to sell 1000 kgs of cement at Rs. 1,00,000.  On 10th July, Mr. S revised the contract price to Rs. 1,10,000. What will be the treatment?
Mr. S will issue a supplementary invoice or a debit note to Mr. B within 10th August.

Will GST apply on the additional Rs. 10,000? 
Since consideration had not been received earlier and no taxes were paid, GST will apply on the complete new value of contract, i.e., Rs. 1,10,000.

If Mr. B had paid Rs. 1,00,000 in advance in June 2017, and Mr. S had deposited the VAT collected?
Then GST would apply only on the additional Rs. 10,000.

Case 2

Considering the same contract price as above, Mr. S reduces the contract price to Rs. 80,000. What will happen now?
Mr. S will issue a credit note to Mr. B for Rs. 20,000.

Can Mr. S. reduce his tax liability (assuming by Rs. 1,000)?
Mr. S. can reduce his tax liability only if Mr. B reduces his input tax credit by relevant amount (Rs. 1,000).

What happens if Mr. B had already paid in advance?

Mr. S. could revise his VAT return even after GST and claim refund of Rs. 1,000. Mr. B would have to reverse Rs. 1,000 from the input tax credit carried forward to GST.

Case 3

Mr. B is an unregistered buyer. How will the treatment be done if prices are reduced?
Mr. S. will not be able to reduce his tax liability unless he passes on the benefit to Mr. B and has proof of doing so. This is in line with the concept of unjust enrichment where no one can enjoy unjustly at the expense of another.

Do you have more questions on transition? Please visit ClearTax for more articles on transition provisions of GST.

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