1. Clarification regarding GST applicability on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law (refer Circular no. 178/10/2022 – GST)

The Circular has clarified the scope of entry “agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act” with respect to taxability of certain transactions. Have listed below the relevant scenarios as referred in the Circular for your reference:

Liquidated damages: Liquidated damages are amounts paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract. There is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the liquidated damages. In such cases, it is clarified that the liquidated damages are merely a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute consideration for a supply and are not taxable.

However, it should be noted that implications of such clarification should be analysed on a case to case basis, post review of relevant agreements of the transaction. For instance, it has been clarified that amounts paid for acceptance of late payment, early termination of lease or for pre-payment of loan or the amounts forfeited on cancellation of service by the customer as contemplated by the contract as part of commercial terms agreed to by the parties, constitute ‘consideration’ for the supply of according such facilities or making arrangements for the intended supply. Therefore, such payments, even though they may be referred to as fine or penalty, are subject to GST, in cases where the principal supply is taxable.

Recent GST Circulars 177, 178 & 179 dated 03 August 2022

Forfeiture of salary or payment of amount as per the employment bond for leaving the employment before the minimum agreed period: Amounts recovered by the employer is not a consideration for tolerating the act of such premature quitting of employment, but as penalties for dissuading the non-serious employees from taking up employment and to discourage and deter such a situation. Accordingly, the same are not taxable under GST. Further, there are multiple advance rulings in which it is held that GST is not payable on notice pay recovery.

Cheque dishonour fine/ penalty: The fine/ penalty that the supplier or banker imposes for dishonour of a cheque, is a penalty imposed for not tolerating the act or situation, but penalizing with the aim to deter and discourage such an act or situation. Therefore, such fine/ penalty is not a consideration for any service and accordingly, not taxable.

Penalty imposed for violation of Laws: Penalty imposed for violation of laws such as traffic violations, pollution norms violation, etc. are also not consideration for any supply received and are not taxable under GST.

Late payment charges: Late payment charges are ancillary supply naturally bundled and supplied in conjunction with the principal supply. Therefore, taxability for the same should be assessed basis taxability of the principal supply.

2. Clarifications regarding applicable GST rates & exemptions on certain services (refer Circular no. 177/09/2022-TRU).

Situations under which recipient, being a body corporate, is liable to pay GST under reverse charge mechanism (RCM) on renting of motor vehicles designed to carry passengers- Where the body corporate hires the motor vehicle (for transport of employees etc.) for a period of time, during which the motor vehicle shall be at the disposal of the body corporate, the body corporate shall be liable to pay GST on the same under RCM. In case, the body corporate avails the passenger transport service for specific journeys and does not take the vehicle on rent for any particular period of time, the body corporate shall not be liable to pay GST on the same under RCM.

• GST is exempt on transportation of employees to and from work by non-air conditioned contract carriage, where transportation takes place over pre-determined route on a pre-determined schedule.

• Applicability of GST on payment of honorarium to the Guest Anchors. However, guest anchors whose aggregate turnover in a financial year does not exceed Rs 20 lakhs (Rs 10 lakhs in case of special category states) shall not be liable to take registration and pay GST.

• Sale of land after levelling, laying down of drainage lines etc. is not taxable under GST

3. Clarification regarding GST rates & classification on certain good (refer Circular no. 179/10/2022 – GST)

• Electric vehicles whether or not fitted with a battery pack, shall attract GST rate of 5%.

• Treated sewage water attracts Nil rate of GST

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February 2024