Liquidated damages collected from service providers for non-performance constitute taxable supply under GST at 18% rate

AAR, AP ruled that liquidated damages collected by APPDCL from a logistics service provider for non-performance constitutes taxable supply under GST. The authority held that such payments, despite being termed as damages, amount to consideration for tolerating non-performance under the agreement. Following Circular 178/10/2022, these payments are incidental to the main supply and taxable at CGST and SGST rates of 9% each under chapter head 9997. The ruling clarified that liquidated damages with clear calculation formulas specified in agreements are subject to GST as consideration for supply of services.

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Issues Involved:
1. Whether liquidated damages collected by APPDCL from Chettinad Logistics Private Limited for non-performance of an act constitute as supply as per Section 7 of GST Act.
2. Classification under GST for such liquidated damages.
3. Applicable rate of tax if the liquidated damages are considered as supply.

Summary:

Issue 1: Whether liquidated damages constitute as supply as per Section 7 of GST Act.
The applicant, APPDCL, sought a ruling on whether liquidated damages collected from Chettinad Logistics Private Limited for non-performance of an act constitute as supply under Section 7 of the GST Act. The Authority examined the provisions of the Indian Contract Act, 1872, and the definition of "consideration" under Section 2(31) of the GST Act. It was determined that liquidated damages paid by the defaulting party to the non-defaulting party for tolerating the non-performance or breach of contract are considered as consideration for tolerating an act under an agreement. Hence, such an activity constitutes a supply of service.

Issue 2: Classification under GST for such liquidated damages.
The Authority classified the liquidated damages under the chapter head 9997, which pertains to "Other Services." This classification was based on the nature of the activity being considered as a supply of service.

Issue 3: Applicable rate of tax if the liquidated damages are considered as supply.
The applicable rate of tax for the activity of collecting liquidated damages was determined to be 18%, comprising 9% CGST and 9% SGST. This rate is in accordance with the tax rate specified under serial no. 35 of Notification No. 11/2017 - Central/State tax rate.

Ruling:
1. Liquidated damages collected by APPDCL from Chettinad Logistics Private Limited for non-performance of an act constitute as supply as per Section 7 of the GST Act.
2. The classification under GST for such liquidated damages is under chapter head 9997 - "Other Services."
3. The applicable rate of tax for the liquidated damages is 18% (9% CGST and 9% SGST).

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