GST and Tax Clauses in Indian Contracts: Who Actually Bears the Tax

A tax clause decides one question that sounds simple and is not: when GST goes up, or a reverse charge notification lands, who actually pays for it. The words that matter are "inclusive of applicable taxes" versus "plus applicable taxes." The first freezes what the seller nets; the second lets the price move with the tax. Most Indian contracts name a GST treatment and stop there, missing the harder pieces: reverse charge under Section 9(3) and 9(4) of the CGST Act, 2017, what happens when the rate itself changes mid-contract, and whether the other side must hand you a tax invoice you can actually use for input credit. (Adira, which publishes this guide, sells contract review and CLM software, so it has a commercial interest in you signing more contracts through a system like this. This page is written to be useful either way.) Below is the statutory text, a Supreme Court ruling on shifting indirect tax liability by contract, and the mechanics that separate a tax clause that protects you from one that quietly does not.

Plain meaning

A tax clause does three jobs: it fixes whether the stated price already includes GST or GST sits on top; it says who carries the compliance burden, meaning who issues the tax invoice and who bears reverse charge liability where GST law shifts the payment obligation to the recipient; and it decides what happens if the rate changes after signing, not hypothetical since India rebuilt its GST rate structure in September 2025, and contracts silent on rate change absorbed that shift by default rules most drafters had never read. What it has to get right is allocation: given a fixed statutory tax, who inside the two parties eats a change in it, and who is exposed if the paperwork is wrong.

Who it protects and what triggers it

Every commercial contract for goods or services in India needs a tax clause, since GST applies to nearly all such supplies. It protects the seller against absorbing a future rate rise on an already-fixed price, and the buyer against paying GST it can never recover as input credit because the seller never issued a compliant invoice. It is triggered at signing, when it fixes inclusive versus exclusive pricing; whenever Section 9(3) or 9(4) reverse charge shifts payment to the recipient, since the statute makes the recipient liable regardless of the contract, though the contract decides who bears the cost; and whenever the Council changes a rate, as it did wholesale in September 2025, when a vague clause forces an argument about who absorbs the difference on a contract signed before the change.

What to look for

Five things decide whether a tax clause actually protects you.

1. Inclusive or exclusive of tax. "Inclusive of all taxes" fixes what the seller nets regardless of rate changes; "plus applicable taxes" passes a rate rise to the buyer. Same rupee figure, opposite outcome.
2. A named tax invoice obligation. Input tax credit under Section 16 of the CGST Act needs a valid invoice from a supplier who has filed and paid. Silence leaves the buyer's credit hostage to the seller's compliance.
3. Reverse charge allocation. Where Section 9(3) or a notified Section 9(4) category applies, the recipient must self-invoice and pay GST directly to the government, on top of the price, and, for government or PSU buyers, on top of the 2% GST TDS Section 51 separately deducts at source above Rs 2.5 lakh. Silence means this surfaces only at audit.
4. A change-in-law or tax-change clause. Without one, a rate change lands wherever the inclusive or exclusive wording happens to put it, with no mechanism to true up.
5. Place of supply, on interstate or export deals. Charging CGST plus SGST where IGST was due, or missing an export's zero-rating, charges the wrong head and the credit claim fails (see below).

A quick test: read the pricing clause and ask, out loud, whether it says "inclusive of" or "plus." If you cannot answer in one sentence, the clause has not resolved the question it exists to resolve.

The Indian position: reverse charge under Section 9 of the CGST Act

Section 9(3) is the general reverse charge power, used for categories such as certain legal services, goods transport agency freight, and a director's services to a company:

"The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both."

Source: Section 9(3), CGST Act, 2017 (Indian Kanoon)

Section 9(4), rewritten by the 2018 amendment effective 1 February 2019, is narrower than the original 2017 version, which briefly imposed reverse charge on all purchases from unregistered suppliers before being deferred and redrafted:

"The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both."

Source: Section 9(4), CGST Act, 2017 (Indian Kanoon)

Neither subsection is a general rule that buying from an unregistered vendor triggers reverse charge. Section 9(4) bites only where notified, the clearest example being real estate promoters buying construction materials from unregistered suppliers; day to day, Section 9(3)'s notified list, legal services from an advocate, sponsorship, GTA freight, matters more. A tax clause should name which applies, since "the parties will comply with applicable GST law" tells a finance team nothing when a self-invoice is due. And since reverse charge makes the recipient liable to the government, the amount is on top of the contract price, inclusive or exclusive wording notwithstanding; it can usually be claimed back as input credit, but the cash leaves first.

Named Indian case: Rashtriya Ispat Nigam Ltd v Dewan Chand Ram Saran

Rashtriya Ispat Nigam Ltd v M/S Dewan Chand Ram Saran (Civil Appeal No. 3905 of 2012, Supreme Court, decided 25 April 2012) is the leading authority on whether a contract can shift indirect tax liability between parties by agreement, the exact question a tax clause answers. RINL, a public sector steel company, engaged Dewan Chand Ram Saran as a handling contractor. Clause 9.3 said the contractor would bear "all taxes, duties and other liabilities" arising in connection with its obligations, and RINL deducted service tax from its bills on that basis.

Source: Rashtriya Ispat Nigam Ltd v M/S Dewan Chand Ram Saran, Civil Appeal No. 3905 of 2012 (Indian Kanoon)

The Supreme Court held that indirect tax, ultimately passed on rather than borne by the person legally liable to remit it, can validly be reallocated between contracting parties by an express clause, and gave effect to Clause 9.3 exactly as written, against the contractor. The reasoning is tax-neutral, about freedom to allocate an indirect tax burden by contract, not service tax specifically, which is why it applies just as much to GST: a "shall bear all taxes" clause is enforceable even where it produces a result one side later regrets, which is why the specific wording matters more than a vague reference to "applicable law."

Change in law: what happens when the GST rate moves

On 3 September 2025 the GST Council collapsed the four-slab structure into essentially two rates, 5% and 18%, moved most 12% items down to 5% and most 28% items down to 18%, and created a 40% slab for luxury and sin goods, effective 22 September 2025. Every fixed-price contract running past that date and silent on rate change had to resolve the shift without a clause written for the question.

Source: GST 2.0: New Rate Slabs and Rules (Cygnet)

Where a contract is silent, the closest default is Section 64A of the Sale of Goods Act, 1930, which applies only to contracts for the sale of goods, not services, and works only "unless a different intention appears from the terms of the contract":

"In the event of any tax being imposed, increased, decreased or remitted in respect of any goods after the making of any contract for the sale of purpose of those goods... 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."

Source: Section 64A, Sale of Goods Act, 1930 (IBC Laws)

Two limits matter. Section 64A does not extend to pure services contracts, most of what SaaS and consulting agreements are, leaving those with no statutory fallback at all. And it yields entirely to a contrary intention: "inclusive of all taxes" is exactly that, and switches the default off, leaving the seller absorbing the increase. An explicit change-in-law clause, a straight pass-through, a split, or a right to renegotiate above a stated threshold, is the only way to control the outcome instead of inheriting whatever the wording produces by accident.

Section 7 of the IGST Act treats a supply as inter-state, taxed as IGST rather than CGST plus SGST, whenever the supplier and the place of supply fall in different states; getting the head wrong means the credit claim can be rejected (source: Section 7, IGST Act, 2017). Exports and SEZ supplies are zero-rated under Section 16 of the IGST Act, no GST on the outward supply, but the exporter can still claim input credit, either under a bond or Letter of Undertaking with a refund, or by paying IGST and claiming it back (source: Section 16, IGST Act, 2017). E-invoicing has been mandatory since 1 August 2023 above Rs 5 crore turnover, and a missing e-invoice is not a valid tax invoice for credit purposes.

You do not need a lawyer to check whether your draft actually names the tax treatment; you can mark up the pricing and tax clauses free in Weave and see, in plain terms, whether "inclusive" or "plus" is what the words on the page actually say.

Red flags

Normal	Red flag	Why it matters
Price stated exclusive of GST, charged additionally at the rate in force	"Inclusive of all taxes," no qualification, in a multi-year contract	Seller absorbs every future rate rise, like September 2025's, with no adjustment
A named change-in-law clause covering GST rate movement	No change-in-law clause at all	Outcome falls to Section 64A (goods only, switched off by inclusive wording) or to argument
Reverse charge liability expressly allocated under Section 9(3) or notified 9(4) categories	Silence on reverse charge for a supply actually notified (legal services, GTA freight, director's fees)	Recipient discovers self-invoicing and cash outflow only at audit, on top of the invoiced price
A defined supplier obligation to issue a valid, timely tax invoice, with a cure period for errors	No invoicing obligation stated	Buyer's Section 16 input credit depends on a valid invoice from a supplier who has filed and paid
Place of supply and tax head stated, and Section 51 TDS acknowledged for government or PSU buyers	Silence on place of supply, or on GST TDS in payment terms	Wrong head charged rejects the credit claim; TDS silence means less cash than invoiced
Export or SEZ contracts reference Section 16 zero-rating and the bond or pay-and-refund choice	Export contract silent on zero-rating, treated like a domestic sale	Exporter may pay GST unnecessarily, or miss the refund window

Bad clause to better clause

Bad: "The prices set out in Schedule A are inclusive of all applicable taxes. The Vendor shall be solely responsible for the payment of all taxes arising in connection with this Agreement."

What is wrong: "inclusive of all taxes" fixes what the vendor nets regardless of any future GST rate change, so a rise like September 2025's reform is absorbed entirely by the vendor with no adjustment mechanism, and "solely responsible for payment of all taxes" says nothing about reverse charge, where the recipient, not the vendor, is who the law actually makes liable to pay the government.

Better: "The prices set out in Schedule A are exclusive of GST. GST shall be charged additionally at the rate in force under the CGST Act, 2017, the applicable State GST Act, or the IGST Act, 2017, as the place of supply determines, and shall be payable by Client against a valid tax invoice issued by Vendor in compliance with Section 31 of the CGST Act, 2017. Where any supply under this Agreement is subject to reverse charge under Section 9(3) or a notified category under Section 9(4) of the CGST Act, 2017, Client shall self-invoice and remit the applicable tax directly to the Government, and such amount shall not reduce the price otherwise payable to Vendor. If the rate of GST applicable to any supply changes after the Effective Date, the price payable shall be adjusted to reflect the changed rate from the date the change takes effect, without requiring an amendment to this Agreement."

What changed: exclusive pricing replaces inclusive, so a rate change passes through instead of being silently absorbed; the invoice obligation is tied to Section 31 so input credit is not left to chance; reverse charge liability sits with the party the statute makes liable, at no cost to the other side's price; and a standing rate-change mechanism removes the need to renegotiate every time the Council moves a slab.

How it interacts with related clauses

• Payment terms. The tax clause decides how much is owed; payment terms decide when, and both input credit and TDS depend on the invoice timing set there. See our payment terms guide.
• Late payment interest. GST TDS credited to a cash ledger, or a disputed reverse charge amount, can delay what reaches a supplier's bank account, exactly the shortfall a late-payment interest clause needs to define. See our late payment interest guide.
• Force majeure and change in law. A GST rate change is not force majeure, but it is what a change-in-law clause exists to allocate; folding it into force majeure language rather than the tax clause often leaves it uncovered by either. See our force majeure guide.

US and global contrast

The US has no federal VAT or GST. Sales tax is levied by individual states, generally on the buyer at the point of sale rather than embedded in the price, with no equivalent to reverse charge for domestic supplies. A US tax clause typically just states the price is exclusive of sales tax, paid on top, leaving rate risk to whichever state's law governs, since state rates move far less often than India's GST Council has moved slabs.

The EU and UK VAT systems sit closer to GST, with input credit chains and a reverse charge for some cross-border B2B services, so a VAT clause asks similar questions: inclusive or exclusive pricing, who is responsible for a valid invoice. The difference is scale and pace: a Council-led rationalisation touching most goods and services on one date, as happened in September 2025, has no real EU or US equivalent, which is why an Indian tax clause needs an explicit change-in-law mechanism a US-style "exclusive of sales tax" clause does not.

FAQ

Does "inclusive of all taxes" mean the vendor absorbs a future GST rate increase? Yes, generally. If the price is fixed as inclusive of taxes and there is no separate change-in-law clause, a rate rise after signing reduces what the vendor nets, since the buyer's total stays the same and GST takes a larger slice of it.

Who pays GST under reverse charge, the buyer or the seller? The law makes the recipient, usually the buyer, liable to pay GST directly to the government under Section 9(3) or a notified Section 9(4) category, through self-invoicing, regardless of what the contract says about who "bears" tax generally. The contract only decides whether that cost reduces the price paid to the seller.

Does a missing or wrong tax invoice block input tax credit? Yes. Credit under Section 16 of the CGST Act depends on a valid tax invoice from a supplier who has filed and paid. A missing, incorrect, or non-compliant e-invoice can get it denied or delayed until corrected.

Is GST charged on exports from India? No. Exports and SEZ supplies are zero-rated under Section 16 of the IGST Act, but the exporter can still claim input credit, either under a bond or Letter of Undertaking with a refund, or by paying IGST and claiming it back.

What is GST TDS under Section 51, and does it apply to private companies? Section 51 requires specified government departments, local authorities, and government-controlled entities to deduct 2% GST TDS on contracts above Rs 2.5 lakh. It does not apply to ordinary private-to-private contracts.

This guide explains how a tax clause allocates GST rate risk, reverse charge liability, invoicing obligations, and place-of-supply treatment, and what the CGST Act, the IGST Act, and the Rashtriya Ispat Nigam ruling say about it. It does not tell you the current rate on your specific goods or services, whether a supply falls under a notified reverse charge category, or whether your drafted clause is enforceable on your exact facts, since that depends on the HSN or SAC classification, the notification in force, and the precise wording you sign, none of which is legal or tax advice. Confirm the applicable rate with a chartered accountant or GST practitioner, and have a lawyer review the clause, before you rely on it in a live contract.