GST applicable on Liquidated Damages recovered from vendors: AAR Uttarakhand

In Re India Optel Limited (GST AAR Uttarakhand)

GST is applicable on Liquidated Damages recovered from vendors: AAR Uttarakhand

In the case “In Re India Optel Limited (GST AAR Uttarakhand),” the issue at hand was the applicability of GST on liquidated damages (LD) recovered by M/s India Optel Limited from their vendors. The ruling was sought under Section 97 of the Central Goods and Services Tax (CGST) Act, 2017, and the Uttarakhand State Goods & Service Tax Act, 2017.

M/s India Optel Limited, a registered entity with GSTIN 05AAGCI2642P5Z7, engaged in manufacturing and entered into contracts with various vendors for the supply of goods and services. These contracts included a clause for liquidated damages in case of delayed delivery or breach of contract by the vendors. Specifically, the clause stipulated a penalty of 0.5% of the contract price for each week of delay, capped at 10% of the contract value.

Applicant’s Position

The applicant sought clarity on whether GST applies to the liquidated damages recovered from vendors. They referenced Board Circular 178/10/2022-GST dated 03.08.2022, which provided two contrasting viewpoints on the issue:

1. Non-taxable Viewpoint: Liquidated damages are seen as a means to ensure performance and deter non-performance. They are not considered consideration for supply and therefore are not taxable under GST.
2. Taxable Viewpoint: If there is an agreement, express or implied, for liquidated damages, the amount recovered constitutes consideration for a supply and is taxable.

Discussion and Findings