GST on Liquidated Damages - Advance Ruling Authority

Liquidated damages are the common terminology used by the parties under a contract. With regard to the indirect tax implications, both in the erstwhile law and the present

GST law, there has always been an issue with regard to the taxability of the liquidated damages and the Government has never come up with any clarification with the same. The present article helps to figure out the GST implication on the same as per the latest advance ruling judgement.

Meaning of the Term Liquidated Damages

Liquidated damages mean compensation agreed upon by the parties entering into the contract and is payable by the party who breaches the contract to a non-breaching party. In simple terms, liquidated damages are the damages/sum of amount which is agreed, upon a contract, to be paid to an affected party by another party on account of the breach of any terms or condition of the contract.

Advance Ruling on Taxability of GST on Liquidated Damages

As per the recent ruling of the Maharashtra Advance Ruling Authority, in the case of Maharashtra State Power Generation Company Limited, GST would be applicable on the liquidated damages and the same covered within Schedule II para 5 clause (e). As per the ruling, there is no specific schedule entry for the liquidated damages and hence the same would be covered within Chapter heading 9997 – ‘Other Services’ and taxable @18% GST (9%

CGST and 9% SGST). The above observation was concluded by the Advance Ruling Authority based on the following –

There are two events, the first event calls for the payment of a contract price to the Contractor and the second event calls for the payment of liquidated damage to the owner.
There is an act of delayed supply and the same has been tolerated by an additional levy in the nature of liquidated damage.
The income (though presented in the form of deduction) from payments to be made to the contractor is the income of the applicant and would be a supply of ‘service’ in terms of schedule II para 5 clause (e) of the GST Act.

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Frequently Asked Questions

Common questions about GST on Liquidated Damages: Advance Ruling Authority.

Liquidated damages are a pre-determined sum of money agreed upon by the parties in a contract, payable by the party who breaches the contract to the non-breaching party as compensation for the breach.

Yes, according to the recent ruling by the Maharashtra Advance Ruling Authority, liquidated damages are subject to GST and are covered under Schedule II para 5 clause (e) of the GST Act.

Liquidated damages are classified under the Chapter heading 9997 – 'Other Services' and are taxable at 18% GST (9% CGST and 9% SGST).

The Advance Ruling Authority concluded that the payment of liquidated damages is an act of delayed supply, which is tolerated by an additional levy in the nature of liquidated damages. Therefore, it is considered a supply of service under Schedule II para 5 clause (e) of the GST Act.

The Advance Ruling Authority's decision was based on the interpretation that there are two events in the contract – one for the payment of the contract price to the contractor and another for the payment of liquidated damages to the owner.

The article mentions that there has always been an issue regarding the taxability of liquidated damages, and the Government has never provided clarification on the same. The advance ruling clarifies the GST treatment of liquidated damages.

The article does not mention any exceptions or specific scenarios where liquidated damages may not be subject to GST. It states that the advance ruling has clarified the GST implications on liquidated damages.

No, the article does not suggest that the parties in a contract can agree on a different tax treatment of liquidated damages. The GST treatment of liquidated damages is based on the interpretation of the GST Act and the advance ruling.

The article specifically mentions the advance ruling by the Maharashtra Advance Ruling Authority. While advance rulings are generally taken as precedents, their applicability may vary across different states or jurisdictions.

The article does not explicitly mention the purpose of including liquidated damages in a contract. However, it can be inferred that liquidated damages serve as a pre-determined compensation for breaching the contract terms, providing a mechanism for the affected party to be compensated.