GST – Change in Contract Price Then and Now

GST has been implemented from 1st July 2017, but still, there are many topics which need the further clarification. Many taxpayers are confused as to how to proceed with their day to day transactions with their suppliers and customers. They have queries regarding invoices etc. One of the many common phenomena in any business is a change in contract price. This change can be a result of any escalation clause inserted in any contact. Few of the common reasons for this change in contract price can be changed in the prices of input materials or input services or any change in the market situation.

Now the big question is what will be the result of such change in contract price after the implementation of GST. The provisions for this situation are provided in Sub-section 2 of Section 142 of Central Goods and Service Tax Act, 2017. This section deals with miscellaneous provisions regarding the transition from old laws to GST. In order to understand the implications of it have to clear about the fact that such change can either result in an increase in contract price or decrease in the contract price. Treatments of such increase or decrease in contract price are provided in Clause (a) and (b) of the said Sub-section 2 of Section 142 respectively. Let us discuss them in detail in this article.

Preconditions for such Provisions

  • Such revision must be in pursuance of the contract.
  • The contract must be entered before the implementation of GST i.e. 1 July 2017.
  • Such revision happened on or after the appointed day i.e. 1sy July 2017.

Contract Price Revised Upward

If the contract price is revised in the upward direction on or after the date of implementation of GST on 1st July 2017, the following provisions apply;

  • then the taxpayer who has removed or provided such goods or services or both will be required to issue either a supplementary invoice or a debit note for such increased amount of contract price.
  • This supplementary invoice or debit note should contain all such particulars as may be prescribed.
  • It must be issued within 30 days from the date of such revision in the contract price.
  • Such supplementary invoice or debit note is deemed to be issued under GST law against the outward supply made by them.

Let’s try to understand and it with the help of an example.

Mr. A entered into a contract with Mr. B to sell him goods worth Rs.50,000/- on 20th June 2017. Later on 15th July, he revised the contract price to Rs.60,000.

In the given situation contract price was revised after the implementation of GST on 1st July 2017. Hence, Mr. A will be required to issue a supplementary invoice or debit note for such increased amount of Rs.10,000 (60,000-50,000).

This supplementary invoice or debit note is to be issued by 15th August 2017.

Tax implication in the given case

In the given case if the tax implication will depend on two factors;

  • If payment has been made before implementation of GST

In this case where payment is already received before GST implementation by Mr. A and he had deposited the tax applicable on the same too, then GST will only apply to the additional cost of contract i.e. Rs.10,000.

  • If payment has not been made before implementation of GST

In this case where payment not received before GST implementation by Mr. A and he had not deposited the tax applicable on the same, then GST will apply on the additional entire revised cost of contract i.e. Rs.60,000.

Contract Price Revised Downward

If the contract price is revised in the downward direction on or after the date of implementation of GST on 1st July 2017, the following provisions apply;

  • then the taxpayer who has removed or provided such goods or services or both will be required to issue a credit note for such increased amount of contract price.
  • This credit note should contain all such particulars as may be prescribed.
  • It must be issued within 30 days from the date of such revision in the contract price.
  • Such credit note is deemed to be issued under GST law against the outward supply made by them.

Let’s try to understand and it with the help of an example.

We will reverse the previous example. Mr. A entered into a contract with Mr. B to sell him goods worth Rs.50,000/- on 20th June 2017. Later on 15th July, he revised the contract price to Rs.40,000.

In the given situation contract price was revised after the implementation of GST on 1st July 2017. Hence, Mr. A will be required to issue a credit note for such decreased amount of Rs.10,000 (40,000-50,000).

This credit note is to be issued by 15th August 2017.

Tax implication in the given case

In the given case if the tax implication will depend on two factors;

  • If taxes have been paid as per old laws

In this case where payment is already received before GST implementation by Mr. A and he had deposited the tax applicable on the same too, then he has an option to revise his tax return and can claim a refund of tax paid on such reduced contract price. Here Mr. B will also be required to revert back the ITC claimed on such tax paid if carried forward under GST.

  • If taxes have not been paid as per old laws

In this case, where payment not received before GST implementation by Mr. A and he had not deposited the tax applicable on the same, Mr. A can only reduce his tax liability if Mr. B lets go of his ITC by the same amount.