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

Contractual consideration for refraining, tolerating or doing an act is taxable only if an independent contractual supply exists.

GST applies to payments only when there is an express or implied contract under which one party agrees to refrain from, tolerate, or do an act in exchange for consideration; amounts that are merely compensatory or punitive consequences of breach, statutory compensation, forfeiture, or fines are not consideration for such a supply and are not taxable, while contractual ancillary charges (cancellation fees, late payment surcharges, pre payment or early termination charges) that form part of the commercial terms are taxable as supplies and assessed with the principal supply.