Revenue sharing agreements have become increasingly common across industries – from real estate and entertainment to technology and franchising. These agreements define how two or more parties share the proceeds generated from a product, service, or project. However, the introduction of Goods and Services Tax (GST) in India has significantly impacted the structuring of such agreements.

In this article, we delve deep into how to structure revenue sharing agreements in compliance with GST, the implications that follow, and best practices for businesses and professionals to avoid legal and financial pitfalls.

📚 What Is a Revenue Sharing Agreement?

A Revenue Sharing Agreement (RSA) is a contractual arrangement between parties where they agree to divide income or profits generated from a joint activity, business, or service.

Common Use Cases:

• Real Estate: Between developers and landowners.

• Franchising: Between franchisors and franchisees.

• Media & Entertainment: Between content creators and platforms.

• IT & SaaS: Between software developers and distributors.

Such agreements typically define:

• Revenue generation channels

• Percentage splits

• Cost-sharing mechanisms

• Rights and obligations of each party

📊 Understanding the GST Framework in India

Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based tax levied on every value addition in India. It subsumes multiple indirect taxes like VAT,  service tax, and excise duty.

Key Characteristics:

• Dual GST Structure: Central GST (CGST) and State GST (SGST) for intra-state supplies; Integrated GST (IGST) for inter-state.

• Tax on Supplies: GST applies to supply of goods/services for consideration and in the course of business.

• Input Tax Credit (ITC): Allows taxpayers to claim credit for the GST paid on inputs.

🔍 Revenue Sharing vs. Consideration for Supply

In many revenue sharing models, the payment from one party to another could qualify as "consideration for supply" under GST laws, triggering a tax liability.

Scenarios:

1. Two Independent Parties:

   • A landowner and a builder share revenue from apartment sales.

   • The builder sells units and shares 30% of the proceeds with the landowner.

   • GST authorities may view this 30% share as "consideration" for the land contributed by the landowner.

2. Principal-Agent Relationship:

   • A platform charges a commission on sales made by a vendor.

   • The commission is clearly a service provided by the platform.

   • GST is applicable on the commission as a supply of service.

The nature of the relationship and the intent behind payment are crucial in determining whether GST is applicable.

 Taxability of Revenue Sharing Under GST

📌 Case 1: Revenue Share as a Supply of Service

• If one party provides a supply of goods or services and receives a share of revenue as consideration, GST is applicable.

• Example: A marketing agency runs campaigns for a client and is paid based on performance revenue. The share is a fee for service, hence taxable.

📌 Case 2: Joint Ventures or Co-ownership

• Two parties co-own a project (e.g., real estate development) and split revenue.

• If both parties jointly undertake the supply, GST is charged on the entire value of supply by the entity (JV or AOP), not on individual shares.

📌 Case 3: Revenue Distribution with No Supply

• If revenue is shared without any underlying supply between the parties, such as passive profit distribution, GST may not apply.

• Example: Share of profits among partners in a partnership firm.

 Input Tax Credit (ITC) Implications

In revenue sharing arrangements, Input Tax Credit eligibility depends on the structure and registration of the parties involved.

✅ ITC Allowed When:

• The recipient of the service is registered under GST.

• The supply is used in the course or furtherance of business.

• The invoice is available and tax has been paid by the supplier.

❌ ITC May Be Denied When:

• The shared revenue is treated as income and not as consideration.

• The party receiving the revenue share is not making taxable outward supplies.

To avoid denial of credit, contracts should clearly define the supply and the consideration, and parties should ensure proper invoicing and GST compliance.

 Key Considerations While Drafting Revenue Sharing Agreements

📝 1. Define Nature of Supply

Clearly identify whether the activity involves supply of goods or services. This determines if GST is applicable and at what rate.

📝 2. Specify Consideration

Mention whether the revenue share is a fee for service, royalty, commission, or profit distribution. The treatment under GST varies accordingly.

📝 3. Invoice Requirements

Ensure the party receiving the share issues a valid GST invoice if it's a consideration for a taxable supply.

📝 4. Registration of Parties

Ensure all parties to the agreement are registered under GST, if required, to avoid compliance issues.

📝 5. Place of Supply

This determines whether CGST + SGST or IGST applies. For services, place of supply rules become critical.

📝 6. Reverse Charge Mechanism (RCM)

Identify if any revenue payments fall under RCM. For example, legal services or import of services.

 GST Compliance Checklist for Revenue Sharing Arrangements

To stay compliant, businesses should follow this GST checklist:

📁 Example Structures and Their GST Impact                         

🔄 Example 1: Developer and Landowner (Joint Development Agreement)

• Landowner gives development rights to a builder.

• Builder constructs and sells flats.

• Revenue is shared (e.g., 60:40).

• GST is applicable on the construction service supplied by builder to landowner and to buyers.

• Landowner must issue invoice for his share if actively involved.

🔄 Example 2: Platform and Content Creator

• Platform shares ad revenue with the creator.

• The creator is providing a service (content).

• GST is applicable on the creator’s income if above threshold and registered.

🔄 Example 3: Franchise Model

• Franchisor grants brand rights and receives revenue share.

• Royalty or license fees are considered taxable services.

• GST is applicable under forward charge.

📈 Strategic Tips to Optimize GST Efficiency

• Choose JV structure where joint execution helps avoid multiple GST layers.

• Document all revenue flows with clarity on services vs profit-sharing.

• Use contractual clauses to apportion tax liability and indemnify against non-compliance.

• Consider advance rulings for clarity in ambiguous cases.

• Consult GST experts during contract negotiation stages.

 Conclusion

• Whether revenue share constitutes a supply,

• How consideration is defined,

• And how GST compliance is to be managed.

It’s not just about tax liability—missteps can lead to disputes, loss of input credit, or even penal consequences. Working with tax professionals and ensuring that your agreements are GST-smart is no longer optional—it’s essential.

📌 Final Thought

In the GST regime, substance over form governs tax treatment. Structuring revenue sharing agreements isn’t just a legal necessity but a financial strategy. Getting it right can lead to smooth operations and significant savings. Getting it wrong? That could invite audits, penalties, and business disruptions.

Created & Posted by Twinkle Jha

Operations Head at TAXAJ

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