GST on Liquidated Damages

[SARAVANAN RENGACHARY]

Dear Experts,

As per recent Maharastra Advance Ruling, GST is applicable on Liquidated Damages.

Generally, Invoices are raised for full value with applicable GST as per the PO. Though the delivery is delayed and i.e. 10% LD is applicable, as accounting practice, invoice is raised for full value and GST on such full value is paid.

Customer will release the payment after deducting 10% LD. Such deducted amount will be treated as expenses in the books of supplier.

Scenario after Advance ruling:

It seems that the supplier has to raise the invoice for full value with GST and the customer has to release the payment for full and separately raise a invoice on the supplier for 10% LD with GST. Not sure whether input credit is eligible for such services.

If the LD is deducted by Government Customer, will it fall under reverse charge mechanism?.

Please share your valuable views.....

Saravanan.

[Nitika Aggarwal]

In regards to aforesaid advance ruling, we would first like to contend that advance rulings are not binding to the person in general except to the person who has appeal for it. Further, in my humble submissions, GST shall not be exigible on the amount deducted in the form of liquidated damages, as it form the part of contract itself.

Furthermore, in your case, if Government customer has deducted the amount of liquidated damages then tax liability on such amount shall be discharged by the receiver of services under reverse charge mechanism provided the recipient of services must be a business entity located in taxable territory.

In order to substantiate our view, we would like to draw your kind attention towards entry no 5 of Notification No. -13/2017-Central Tax Rate dated 28.06.2017 and the same reads as under:-

5

Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, - (1) renting of immovable property, and (2) services specified below- (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers.

Central Government, State Government, Union territory or local authority

Any business entity located in the taxable territory.

Regards

Nitika Aggarwal

9953157961

[SARAVANAN RENGACHARY]

Dear Nitika Aggarwal,

Thanks, we value your response.

If we pay tax on reverse charge basis on the LD amount deducted by government, hope, the same tax can be availed as in put credit. Actually it is not a cost.

Saravanan.

[CSSANJAY MALHOTRA]

Please refer to Notification No 9/2017-IGST rate dated 28.06.17 which provides IGST exemption.

65

Heading 9991 or Heading 9997

Services provided by the Central Government, State Government, Union territory or local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Central Government, State Government, Union territory or local authority under such contract.

Nil

Nil

[YAGAY andSUN]

We are in agreement with Mr. Sanjay Malhotra.

AI Summary

GST on liquidated damages: exemption for government tolerated non performance or reverse charge on deduction. Whether GST applies to liquidated damages is disputed: one practical consequence of an advance ruling is taxation on such deductions with suppliers invoicing full contract value and customers separately invoicing deducted amounts. Alternatively, submissions rely on government-supplies notifications-arguing either that such damages are not exigible as contractual components or that where a government customer deducts damages any tax must be discharged by the recipient under the reverse charge mechanism; another submission cites a nil-rate exemption for government-tolerated non-performance attracting fines or liquidated damages.