Compliance
GST in Business Contracts India: Clauses, Compliance & Impact
Every business contract in India must address GST. Without a proper GST clause, disputes arise over who pays the tax, what happens when rates change, and whether Input Tax Credit (ITC) can be claimed. This guide covers every GST clause your contracts need — and the costly mistakes to avoid.
Why GST Clauses Matter in Contracts
GST introduced on July 1, 2017 fundamentally changed how contracts are priced and executed in India. Pre-GST contracts often had cascading tax issues. Post-GST, the main friction points are:
- Price quoted as "inclusive" vs "exclusive" of GST — ambiguity costs lakhs
- GST rate changes mid-contract affecting profitability
- Wrong GSTIN reducing buyer's ITC eligibility
- Time of supply mismatches causing late payment penalties
GST Rates Quick Reference for Common Business Services
| Category | GST Rate | Common Examples |
|---|---|---|
| Professional services | 18% | Consulting, legal, accounting |
| IT services / SaaS | 18% | Software development, cloud services |
| Construction services | 12% / 18% | Works contract (residential vs commercial) |
| Transportation services | 5% (no ITC) / 12% | Goods transport, logistics |
| Manpower supply | 18% | Contract staffing, outsourced HR |
| Insurance | 18% | General, health, life premiums |
| Real estate (commercial) | 18% | Leasing commercial space |
7 Essential GST Clauses for Every Business Contract
1. GST-Inclusive or GST-Exclusive Price
State explicitly: "The contract price of ₹X is exclusive of GST. GST at the applicable rate shall be charged additionally." Or: "The contract price of ₹X is inclusive of all taxes including GST." Never leave this ambiguous.
2. GST Number (GSTIN) Clause
Both parties should provide their GSTIN. Include: "Each party shall provide a valid GSTIN. If GSTIN is incorrect or missing, the buyer waives any claim for Input Tax Credit loss arising from such error."
3. GST Rate Variation Clause
Protects the supplier if GST rates change: "If GST rate changes after the effective date of this agreement, the contract price shall be adjusted to reflect the new rate, with the buyer bearing additional tax or the supplier refunding excess tax collected."
4. Tax Invoice Requirements
Specify that payment will only be made against a valid GST tax invoice (not a proforma or quote). Include the mandatory fields: GSTIN of both parties, HSN/SAC code, tax amount breakup (CGST/SGST/IGST), and place of supply.
5. Place of Supply Determination
Critical for determining IGST vs CGST/SGST. If the supplier and recipient are in different states, IGST applies. Include the registered address of both parties and confirm the determined place of supply to avoid classification disputes.
6. ITC Compliance Undertaking
Buyer's protection clause: "Supplier undertakes to file GST returns on time, deposit GST collected, and cooperate in resolving any ITC mismatches arising under GSTR-2B. Any loss of ITC due to non-compliance by Supplier shall be indemnified by Supplier."
7. Reverse Charge Mechanism (RCM) Clause
If RCM applies (e.g., legal services from advocates, GTA services), clearly state which party will account for GST under reverse charge. Failure to account for RCM leads to interest and penalties.
GST Issues in Specific Contract Types
Service Agreements
Time of supply for services is the earlier of: invoice date, receipt of payment, or date of provision of service. Contracts with milestone-based payments must align invoice dates with milestones to avoid GST timing issues.
Works Contracts (Construction)
Works contracts are taxed as services (not goods). Residential construction: 12%; commercial: 18%. If your contract covers both civil work and materials, ensure proper bifurcation to avoid disputes.
SaaS/Software Licensing
Software as a service is taxed at 18%. Downloadable software may be treated differently. Contracts must specify whether the supply is a service (18% IGST) or goods (SAC vs HSN codes matter).
Common GST Mistakes in Contracts
- ❌ Not specifying GST-inclusive vs exclusive — leads to supplier absorbing GST
- ❌ Wrong place of supply determination — IGST vs SGST/CGST classification error
- ❌ No ITC protection clause — buyer loses ITC if supplier doesn't file returns
- ❌ No rate change clause — supplier bears GST rate increase from own margin
- ❌ Outdated/wrong GSTIN — invalidates tax invoice and ITC claim
Is Your Contract GST-Compliant?
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Analyze Your Contract Free →Key Takeaways
- ✅ Always specify whether prices are GST-inclusive or exclusive
- ✅ Include a GST rate variation clause to protect against rate changes
- ✅ Get an ITC protection undertaking from your supplier
- ✅ Both parties' GSTINs and place of supply must be stated in the contract
- ✅ For RCM-applicable supplies, clearly state which party accounts for tax
Frequently Asked Questions
Should GST be mentioned in business contracts in India?
Yes. Every business contract should clearly state whether quoted prices are inclusive or exclusive of GST, which party bears the GST, and what happens if GST rates change after signing. Ambiguity leads to disputes and tax notices.
Who is liable to pay GST — buyer or seller?
The supplier is legally obligated to collect and deposit GST. However, the economic burden falls on the buyer unless the contract specifies otherwise. Contracts should always clarify this explicitly.
What is a GST variation clause in a contract?
A GST variation clause protects the supplier if GST rates change after the contract is signed, allowing the contract price to be adjusted accordingly. Without it, the supplier bears the loss if rates increase.
Can GST be charged on a contract where no GST number is mentioned?
A supplier must charge GST on taxable supplies regardless. However, the buyer can claim Input Tax Credit only if the supplier's GSTIN is on the tax invoice.
Related reads: Stamp Duty on Agreements India · Vendor Agreement Guide · Service Agreement Essentials