Increase or Decrease of Tax After the Contract under Section 64A of the Sale of Goods Act, 1930: Adding an Increased Tax to the Price, Deducting a Remitted Tax, the Taxes Covered, and a Contrary Intention

Prices are quoted on the footing of the taxes in force when the bargain is struck. If a duty is imposed, raised, lowered or remitted between contract and performance, one party gains and the other loses through no fault of either. Section 64A, added by an amending Act in 1940, reallocates that burden. Unless the contract shows a different intention, the seller may add an increased or newly imposed tax to the price, and the buyer may deduct a decrease or remission. The section applies to customs duty, excise duty and taxes on the sale or purchase of goods.

Which way the adjustment runs, the taxes covered, and the principle behind the section

1. The Section

Section 64A, Sale of Goods Act, 1930, in substance

(1) Unless a different intention appears from the terms of the contract, in the event of any tax of the nature described in sub-section (2) being imposed, increased, decreased or remitted in respect of any goods after the making of any contract for the sale or purchase of such goods:

(a) if such imposition or increase takes effect so that the tax or increased tax is paid or payable, the seller may add so much to the contract price as will be equivalent to that amount, and he is entitled to be paid and to sue for and recover such addition;

(b) if such decrease or remission takes effect so that the decreased tax only, or no tax, is paid or payable, the buyer may deduct so much from the contract price as will be equivalent to the decrease or remission, and he is not liable to pay or be sued for that deduction.

(2) The provisions of sub-section (1) apply to the following taxes: (a) any duty of customs or excise on goods; (b) any tax on the sale or purchase of goods.

2. When the Section Applies

The change must occur after the contract is made and before performance. A tax already in force when the parties contracted is assumed to be built into the price.
The contract must be silent, or at least must not show a different intention. A term that the price is inclusive of all present and future taxes, or that any change is for the seller's account, displaces the section.
The tax must be one of those listed, and must relate to the goods sold.
The adjustment is exact. The seller may add, and the buyer may deduct, an amount equal to the change, no more and no less.
The seller may sue for the addition, which is treated as part of the price.

⚠ A worked illustration

A agrees on 1 April to sell machinery to B for Rs. 10,00,000, the contract saying nothing about tax. Delivery is due on 1 July. On 1 May the excise duty on such machinery is raised, adding Rs. 40,000 to the duty payable on the goods. Unless the contract shows a different intention, A may add Rs. 40,000 to the price and recover Rs. 10,40,000, and may sue for the addition if B refuses. If instead the duty had been remitted to the extent of Rs. 40,000, B could have deducted that sum and paid Rs. 9,60,000, and A could not have sued for the difference.

3. The Taxes Covered

Customs duty on goods, payable on import or export.
Excise duty on goods, payable on manufacture or production.
Any tax on the sale or purchase of goods, which historically meant the sales tax levied by the States, and later value added tax and the central sales tax.
Taxes outside the list are not covered, so an increase in, for example, income tax or a municipal levy on the seller's premises gives no right of adjustment under this section, though the contract may provide for it.

4. Contrary Intention

Section 64A yields to the contract. Commercial contracts commonly deal with the point expressly, and the usual formulations are these. A price stated as inclusive of all taxes throws the risk of a change on the seller. A price stated as exclusive of taxes, with taxes extra as applicable, throws it on the buyer, whether the change is up or down. A tax variation clause may allocate increases and decreases expressly, sometimes with a threshold or a cap. Where such a term exists, it governs, and Section 64A does not apply.

5. The Position After GST

Since the goods and services tax replaced most of the indirect taxes on goods in 2017, the practical field of Section 64A has narrowed. Central excise and the State sales taxes have largely been subsumed, and GST is charged on the supply rather than on the sale in the sense of the 1930 Act. Customs duty on imported goods continues. Whether a change in the GST rate falls within Section 64A depends on whether GST is a tax of the nature described in sub-section (2), which should be checked against current authority in a particular case. What is clear is that the principle of the section has become standard drafting practice: most commercial contracts now carry an express tax variation clause, which is exactly the allocation Section 64A makes by default.

6. The Position Stated Shortly

Section 64A applies where a tax on the goods is imposed, increased, decreased or remitted after the contract is made.
It operates unless a different intention appears from the terms of the contract.
The seller may add an imposition or increase to the price and sue for it.
The buyer may deduct a decrease or remission and is not liable for it.
The taxes covered are customs duty, excise duty and taxes on the sale or purchase of goods.
Express tax clauses, such as inclusive or exclusive pricing, displace the section.
After GST the field is narrower, and the position for GST rate changes should be checked against current authority.