Module 5 of 6 — MSAs for Indian Businesses

GST, TDS, Payment Mechanics, and Commercial Terms

Reading module · approx 13 min

The commercial terms of an MSA — fees, payment timelines, invoicing, GST, TDS — are frequently treated as standard and left to the finance team. They should not be. These clauses determine when the provider actually gets paid and the tax obligations both parties bear.

GST applies to services contracts between Indian entities at the applicable rate — typically 18% for professional and IT services. The MSA should specify whether the quoted fees are exclusive of GST (the standard commercial practice) and require the service provider to issue GST-compliant invoices. A fee clause that is silent on GST creates a dispute about whether GST is included in or added to the quoted fee.

TDS obligations under the Income Tax Act

Tax deducted at source applies to payments under services contracts. The applicable section depends on the nature of services: Section 194C applies to work contracts (including some technical services); Section 194J applies to professional or technical services fees. The applicable rate is typically 2% (194C) or 10% (194J for royalties and FTS), subject to PAN submission and applicable certificates.

The MSA should address TDS by: confirming the paying party's TDS obligation; requiring the provider to submit a valid PAN; specifying that TDS deductions will be accompanied by TDS certificates (Form 16A); and confirming that the fee quoted is gross (i.e., the customer will deduct TDS from the gross fee and the provider will receive the net amount, taking credit for TDS against its tax liability).

Payment terms, milestones, and late payment

Payment terms typically specify payment within 30 to 60 days of invoice. The MSA should address: the invoicing cycle (monthly, milestone-based, or per SOW completion); the dispute period during which an invoice can be challenged; the consequence of disputed portions (typically: pay undisputed amounts, dispute the rest through the dispute resolution mechanism); and the consequences of late payment.

Late payment interest The Interest on Delayed Payments to Micro and Small Enterprises Act, 2023 (MSMED Act) imposes mandatory interest at three times the bank rate on delayed payments to registered MSMEs. If your service provider is an MSME, delayed payment is not just a commercial breach — it carries mandatory interest that may be significantly higher than a standard contract rate. Buyers should check MSME registration status and include a MSME payment protocol in their MSA.

Pricing structures and currency

Services contracts use several common pricing structures: time and material (billed on actual time spent at agreed rates); fixed fee (agreed total regardless of effort); capped T&M (T&M with a maximum not to exceed); milestone-based (payment on achievement of defined milestones). The pricing structure should match the certainty of scope — fixed fee is appropriate for well-defined deliverables; T&M is appropriate for exploratory or iterative work.

For cross-border contracts, currency must be specified. FEMA restricts the manner in which foreign currency payments can be made and received by Indian entities. Cross-border service contracts require proper documentation under FEMA's Liberalised Remittance Scheme or AD bank approval routes, and correct characterisation of the payment (services income vs. royalty vs. FTS) for withholding tax purposes.

Module 6 covers termination, warranties, and governing law — the end-of-contract provisions that most parties do not read until the relationship is already ending.