Indian Railways have issued a clarification on the cancellation of confirmed tickets by the passengers after reports claimed that GST would be levied on the cancellation of railway tickets by the passengers.
Railways issued a statement in which it said,” As per instruction issued dated Sept 23, 2017, in case of cancellation of tickets, refund amount due as per Railway Cancellation of tickets and Refund of Fare Rule along with the total amount of GST charged at the time of booking is refunded in full.” “However, cancellation/clerkage charge applicable as per Refund rule & GST amount on cancellation/clerkage charge is retained by Railways. This is applicable only in AC & 1st class. GST is collected on behalf of the Finance Ministry. No change in rules/provision,” the statement further added.
When I read this first thing that came to my mind was if they are levying GST on Cancellation Charges than what Supply of Services are there for levying GST? They want to levy GST on cancellation as termination of service and toleration of the act. The Service Provider is retaining certain part of the money deposited/paid earlier and on the money retained/forfeited they are levying GST. But still the basic question remains whether the Service Provider ahs provided any supplies to other person or not?
Retention of Deposit Money on Cancellation of Booking whether Chargeable to GST/VAT Internationally?
International Practices of levying VAT/GST on cancellation charges varies from Country to Country. In few Judgements they are subject to VAT/GST and in Others they are not charged. Therefore, it would be difficult to conclude that worldwide taxability of this is same. Sharing few cases where VAT/GST was not levied on cancellation activity.
A Netherlands co-operative operated a cold store for the benefit of its members, who paid a storage charge, fixed annually. In 1975 and 1976 it levied no charges on its members. The Netherlands authorities issued a VAT assessment on the basis that the members had received a benefit as a consequence of the failure to make a charge. The European Court of Justice (ECJ) held that there was no consideration for the supply of the storage services. Consideration for a supply for VAT purposes must have a direct link with the services supplied and must be capable of being expressed in money. It followed that a provision of services for which no definite subjective consideration was received did not constitute a provision of services against payment. Staatssecretaris van Financiën vs Cooperatieve Vereniging ‘Cooperatieve Aardappelenbewaarplaats GA’, ECJ Case 154/80; [1981] ECR 445; [1981] 3 CMLR 337.
The Apple & Pear Development Council was established in 1966 by statutory instrument. Commercial growers had to register with it and pay a compulsory annual charge, based on the area of their land. Initially Customs accepted that its activities were business activities, on which it was entitled to reclaim input tax, and that its charges to growers were outside the scope of VAT. However, in 1981 Customs issued a ruling that its activities did not constitute a business and that it was not entitled to reclaim input tax. Thb xe Council appealed, and the House of Lords (HL) referred the case to the ECJ. The ECJ held that, for a supply of services to be for consideration within Article 2(1) of the EC Sixth Directive, there must be a direct link between the service provided and the consideration received. On the evidence, there was no relationship between the level of the benefits which individual growers obtained from the Council’s services and the amount of the mandatory charges which they were obliged to pay. The compulsory annual charges did not constitute ‘consideration and the Council was not making supplies of services for consideration. Apple & Pear Development Council v C&E Commrs, ECJ Case 102/86; [1988] STC 221; [1988] ECR 1443; [1988] 2 CMLR 394; [1988] 2 All ER 922.
In a French case, the ECJ held that ‘a sum paid as a deposit, in the context of a contract relating to the supply of hotel services which is subject to value added tax, is to be regarded, where the client exercises the cancellation option available to him and that sum is retained by the hotelier, as a fixed cancellation charge paid as compensation for the loss suffered as a result of client default and which has no direct connection with the supply of any service for consideration and, as such, is “not subject to that tax”. Société Thermale d’Eugénie-les-Bains v Ministère de l’Economie, des Finances et de l’Industrie, ECJ Case C-277/05; [2008] STC 2470.
Cancellation Charges in erstwhile Indirect Tax Regime
Under the erstwhile Service tax provisions, the activity of ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’ was termed as deemed service as per Section 66E of Finance Act’1994. This entry was subject to various litigations in Service Tax and the general conclusion was that following activities if carried out by a person for another for consideration would be treated as provision of services:
- Agreeing to the obligation to refrain from an act.
- Agreeing to the obligation to tolerate an act or a situation.
- Agreeing to the obligation to do an act.
Summary of Multiple Litigations in this matter was that a service recipient may be required to fulfil certain conditions in a contract, but that does not necessarily mean that such value shall become a part of the taxable services. For an activity to get covered under the said entry, the flow of consideration from one person to another should be for tolerating an act, refraining from an act or to do an act.
Selected few case laws on this issue are:
CESTAT, Bangalore held that Notice pay recovery is not subject to levy of service tax as the same is received as compensation from employee for non-performance of his contractual obligation and not as a consideration to perform obligation under employment contract. XL Health Corporation India (P.) Ltd. vs Commissioner of Central Tax, [2022] 138 taxmann.com 437 (Bangalore – CESTAT)
CESTAT, Delhi held that Liquidated damages recovered on account of breach or non-performance of contract were not leviable to service tax under section66E(e) of Finance Act, 1994 as declared services. Rajcomp Info Service Ltd. vs Commissioner of Central Excise Commissionerate, Jaipur, [2022] 141 taxmann.com 223 (New Delhi – CESTAT)
CESTAT, Delhi held that amount retained on forfeiture of earnest money deposit and compensation for non-delivery of goods are not liable to service tax under the declared service of agreeing to the obligation to refrain from an act or tolerate an act or situation. Tirupati Balaji Furnaces (P.) Ltd. vs Commissioner, Central Goods and Service Tax, [2021] 132 taxmann.com 264 (New Delhi – CESTAT)
CESTAT, Delhi held that where assessee was running a hotel and it offered advance booking to customers on payment of deposit and in event of cancellation of booking by customer it retained full or part of amount towards cancellation charges, amount retained by assessee by way of cancellation charges did not qualify as taxable receipt under section66E(e) and no service tax was attracted on said amount under provisions of section66E(e). Lemon Tree Hotel vs Commissioner, Goods & Service Tax, Central Excise & Custom, [2021] 127 taxmann.com 247 (New Delhi – CESTAT)
Conclusion
In Indirect Tax era and International Practices cancellation charges are out of VAT/GST but in India they are being brought under the GST net. This is neither Ease of Doing Business nor Simplification of Tax. GST is only 5-year-old and it’s yet to mature because the amendments are both, regular and with enormous speed. One of the objectives of GST or any taxes is to reduce the burden of tax on commoners and charging GST on cancellation of railway ticket is definitely not in this direction.
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Gst cancel ho gaya ha