GST applicability on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law

Taxability of contractual penalties: GST applies only when payments constitute consideration for an independent contractual supply, not mere compensation.

GST treatment of payments such as liquidated damages, penalties, compensation or cancellation and late payment charges depends on whether the payment constitutes consideration for an agreement to refrain from an act, to tolerate an act or situation, or to do an act under para 5(e) of Schedule II. Payments that are merely compensatory flows for breach, statutory compensation or fines for violations are not consideration for a supply and are not taxable; payments that represent consideration for ancillary or independent contractual facilities (eg. cancellation fees, late payment acceptance, prepayment or early termination charges) are taxable and assessed as the principal supply where applicable.