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of <h1>GST Not Applicable on Liquidated Damages and Penalties Unless Linked to Service Agreement: Tax Authorities Advised to Assess Case-by-Case.</h1> The circular addresses the applicability of GST on liquidated damages, compensation, and penalties arising from contract breaches or other legal provisions. It clarifies that such payments are not considered a supply of services under GST unless there is an express or implied agreement between parties to refrain from, tolerate, or perform an act for consideration. Liquidated damages and penalties are typically compensatory and not for tolerating breaches, thus not taxable. Examples include penalties for cheque dishonor, premature employment termination, and compensation for coal block cancellations. The circular advises tax authorities to assess each case based on its specific facts.
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