GST on continuous contracts for lockdown period

Dilemma over taxability of continuous contracts for lockdown period:

Everything is locked down. Offices, shops, malls, schools, hotels for everything. In many cases, the rent for the lockdown period is waived off. But in case of rent, there is an agreement in advance for a specified period. This period may range from 11 months to 5-10 years. The same is the case with the interest. Now during the lockdown, the tenant was not being able to use that shop. He was forced to do so. We can say by the action of nature or by counteraction of our administrators. But then what will be the liability for such amount in GST? Whether it will be liable for tax payment. This type of supply falls in a continuous supply of services.

What is continuous service in GST?

Section 2(33) “continuous supply of services” means a supply of services which is provided, or agreed to be provided, continuously or on a recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes the supply of such services as the Government may, subject to such conditions, as it may, by notification, specify;

Then section 31 provides for the time to raise the invoice in case of a continuous supply of service:

(5) Subject to the provisions of clause (d) of sub-section (3), in case of continuous supply of services,––

(a) where the due date of payment is ascertainable from the contract, the invoice shall be issued on or before the due date of payment;

(b) where the due date of payment is not ascertainable from the contract, the invoice shall be issued before or at the time when the supplier of service receives the payment;

(c) where the payment is linked to the completion of an event, the invoice shall be issued on or before the date of completion of that event.

(6) In a case where the supply of services ceases under a contract before the completion of the supply, the invoice shall be issued at the time when the supply ceases and such an invoice shall be issued to the extent of the supply made before such cessation.

Now if we examine the cases of normal rent agreements. The date when the rent is due is generally mentioned in the agreement. Each month an invoice is required to be issued on such date. How we can skip the invoice for a particular period and then can resume it. Whether GST law allows it? There can be two cases. First is that we revoke the agreement and make the necessary changes to it. In that case, GST can also be adjusted. But let us assume that due to lock down even that is not possible. Then how the taxability of continuous contracts for lockdown period will interplay.

Can we reduce the value of a continuous supply?

When we can reduce the value of supply? We can issue a credit note but then it can be issued for limited purposes. Section 34(1) covers those instances. 

Section 34. (1) where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient a credit note containing such particulars as may be prescribed.

Can we cover it in section 34? Only if the invoice was raised. Then can we simply cover it in the first part, where the value in the invoice exceeds the taxable value? What is the taxable value? As per section 15, The value of supply is:

(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both

One thing is clear, that the value actually payable or even paid is NIL, by mutual agreement of supplier and recipient. The value in GST is derived from the value agreed upon by the unrelated seller and buyer.  As far as they can legally remit the amount of liability for a particular period. They cant be held liable to pay GST. Because the price actually paid/payable is nil.

Now the most important part is whether they can amend a written agreement by mutual consent. Whether it is required to be amended in the written agreement and notarised. Or they can also amend it verbally over the exchange of an email or text. Now it is an issue of the Contract Act and not of GST. 

Section 62 of the Indian Contract Act provide for the alteration in a Contract:

Effect of novation, rescission, and alteration of contract.

—If the parties to a contract agree to substitute a new contract for it or to rescind or alter it, the original contract need not be performed.

But then there must be a novation of Contract. Can we alter a written contract by verbal consent? Verbal. consent is also a consent unless it is taken by fraud or misrepresentation.

Conclusion:

Thus we can say that GST will not be payable for the waiver in continuous contracts. But yes the contract entered between the parties should be amended accordingly. GST on continuous contracts for the lockdown period will not be applicable. 

Sign here word on business documents with eyeglasses and ballpoint pen. Signature or agreement concept