Goods and Services Tax GST applicability on compensation, liquidated damages, & penalties for contract violations etc

GST applicability on compensation, liquidated damages, & penalties for contract violations etc

GST applicability on compensation, liquidated damages, & penalties for contract violations etc

GST applicability on compensation, liquidated damages, & penalties for contract violations, among other things.

The taxability of liquidity damages, cancellation fees, late payment fees, etc. arising from contract breaches is a very frequent query under GST. The issue is raised by Central Goods and Service Tax Act, 2017, Schedule II, Paragraph No. 5(e), which says that "Agreeing to the obligation to refrain from an act, to tolerate an act or a circumstance, or to do an act" is a supply of service if the same qualifies as a "supply" under the Act.

So, in order to avoid confusion, the department released Circular No. 178/10/2022-GST on August 3, 2022, which clearly explains how GST is applied to such charges.

  • Loss and damages are suffered by the other party when one party breaches or fails to perform the contract. The payment is simply an occurrence during the performance of that contract; it is not a consideration for any other independent activity.
  • A contract's essential element is performance. Liquidated damages cannot be construed as payment made in consideration for accepting the contract's breach or non-performance.

Applicability of Goods & Services Tax on liquidated damages

  • According to the CGST Act, Section 7(1)(d), the Scope of Supply definition includes activities referred to in Schedule II of the Act. Schedule II Para (5)(e) thereon specifies that “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” comes under the definition of supply of services.
  • So, liquidated damages are taxable under Goods and Services Tax, based on the premise that the aggrieved party has tolerated the non-performance of the other party under the contract.
  • As Goods and Services Tax applies to the supply of goods and services, liquidated damages will be taxable as a service under the Goods and Services Tax Law. The time of supply would be the point in time when the breach happens, as defined in the contract.

GST rate on liquidated damages

Following GST rate applicable on Liquidated damages

Chapter Heading

Description

Rate

9997

Other services

18%

9991 or 9997

Services provided by the Central Govt, Union Territory or local authority, state govt  by way of tolerating the non-performance of a contract, for which consideration in the form of fines or liquidated damages is to be paid to the Central Govt, state government, Union Territory or local authority under such contract

   

Availability of ITC on liquidated damages

  • Subject to the limitations & conditions needed by Goods and Services Tax law, Goods and Services Tax paid on liquidated damages may be used as an ITC to offset any future tax due.

Who will issue Goods and Services Tax invoice on liquidated damages?

  • A separate GST invoice must be issued for the liquidated damages by the party collecting these.

Details about the Circular No. 178/10/2022-GST   

The field formations have already been advised that while the taxability in each case will depend on the facts of that case, it is possible to use the guidelines provided to ascertain whether tax on an activity or transaction needs to be paid by treating it as a service by agreeing to the obligation to refrain from performing an act, accepting an act or circumstance, or going to perform an act.

Disclaimer: The content of this post isn't considered to be professional or legal advice, We aren't responsible for any damages arising from your access to the location content & must not be relied on or used as a substitute for legal advice from a lawyer professional in your jurisdiction. CARajput is among India's big digital compliance services platform which committed to helping people have started & developed their businesses. We had started with the goal of creating it easier for start-ups to start out their business. Our main aim is to assist the businessman with applicable laws & regulations compliance and providing support at each & every level to make sure the business stays compliant and growing continuously. For any query, help or feedback you may in touch on singh@carajput.com or Call or what’s-up on 9-555-555-480

Share This Post

Related Articles

Related Videos


Types of GST Returns: What is GST Return? | All GST Returns | Types of GST Returns and Due Dates

Types of GST Returns: What is GST Return? | All GST Returns | Types of GST Returns and Due Dates

 

Published On: Nov 09, 2021 | By: RJA


E-Invoicing Under GST? | E-INVOICING ? | All About GST E-Invoice

E-Invoicing Under GST? | E-INVOICING? | All About GST E-Invoice

Published On: Nov 12, 2021 | By: RJA

Need help?

Request a call
from a RJA
Business Advisor.

LET'S TALK

Private Limited Company

Popular Categories

Browse Blogs

Recent Posts

All about the Equity Linked Savings Scheme & its Returns

All about the Equity Linked Savings Scheme & its Returns

New Functionality of the interest calculator in GSTR-3B

New Functionality of the interest calculator in GSTR-3B

How to respond notices for AIS (Annual Information Statement) mismatch?

How to respond notices for AIS (Annual Information Statement) mismatch?

Payment of TDS via using Form 26QB on sale of property

Payment of TDS via using Form 26QB on sale of property

RBI intends to tokenisation assets, bonds as part of the wholesale CBDC pilot.

RBI intends to tokenisation assets, bonds as part of the wholesale CBDC pilot.

Connect with a RJA Advisor

Fields marked with an * are required

Enquire Us

Please send us your query and we feel very happy helping you

Testimonials

  • Thank you very much for all your help in setting up my new company and clearing up all outstanding business in my sole trader accounts. For the first time in years I have peace of mind regards my business accounts. Your workforce are a credit to you, the girls at reception are so helpful and Chris has been brilliant. It is very much appreciated.

    A US consultancy group

  • Rajput Jain & Associates. are a tremendous value added to me as an executive and a busy parent. It just makes sense to delegate my tax file to them -- they are proactive, extremely service oriented, and most importantly, I am completely confident they are finding every dollar of tax savings available to me.

    A Leading Service Provider

  • We use Rajput Jain & Associates for all our accounting, Corporation tax, VAT and other compliance needs. The service is professional, courteous and prompt. I would recommend Rajput Jain & Associates to any company requiring a comprehensive accounting and tax service.

    A Leading Consultancy Firm in Dubai

Money Back Guarantee

Not happy with the service? You can request a refund at anytime within 30 days!

24/7 Support

Get support through phone, email, mobile app or live chat - 24/7, 365 days.

EMI Payment

Easily pay online with EMI payments, credit or debit card, net banking, PayPal and more.

Get In Touch--

Rajput Jain & Associates

Add: P-60, Connaught Circus, Connaught Place, New Delhi-110001

Email: singh@carajput.com

Phone: 9555555480

Legal Disclaimer--

The information contained on this website merely provides details of our firm to persons who have shown interest in knowing more about us and is not intended to solicit work or advertise our capabilities in any manner. The information provided on this website is general in nature and should not be used as a basis of decision-making without further professional advice. The third party site links are only provided for ready reference of the users and CA Rajput Jain & Associates neither controls their content nor undertakes any responsibility regarding them.

© 2016 Rajput Jain & Associates. All Rights Reserved | Sitemap

Call Email