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.

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.