ADVACNE RECEIVED FOR WORKS CONTRACT SERVICE

[vinod jadhav]

client has recieved 1.5cr for loss of project fromt the receipient. client has shown amount as a payable in his balance sheet.

whether gst is payable on receipt of 1.5 cr?

Can client shown amount received for loss of project and not related with sales activity in GST?

[KASTURI SETHI]

Dear Querist,

The term, 'loss or profit' is not relevant in this scenario. Your client has received advance amount. GST is payable but when supply of service has materialized. Emphasis is laid on proviso to Section 2(31) of CGST Act wherein 'consideration' has been defined.

"Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

The terms, 'supply' and 'consideration' are integrally correlated in GST Acts

[Amit Agrawal]

First, said Rs. 1.5 is still payable or become an income for your client?

If same is become an income, one needs to see if same is in penal character or falls under the term "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act''. As lot of these issues can be decided only after studying the facts involved, underlying agreement/s, terms of settlement etc., it is best to consult an expert.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[KASTURI SETHI]

Sh.Vinod Jadhav Ji,

It appears from the query that you are yourself in the profession of consultancy. Pl. elaborate your query so as to enable the experts to post a comprehensive reply which may click as a springboard for you. The query is too brief to reply in a comprehensive manner. Mere mention of the words, 'loss' and 'payable' will not suffice.

What is the latest position of the issue ? Your query also needs clarification and information as pointed out by Sh.Amit Agrawal, Sir.

If you want a reply full of substance, please supply the above information in detail.

[Ganeshan Kalyani]

Let us assume that your client got an order from his customer and due to some reason the customer has cancelled the order. Hence, your client incurred a loss and he received 1.5 crore as a compensation for loss of project. If this is true then your client has to account the same as 'other income' in the right hand side of the Profit and Loss account. GST is not payable in view of recent circular on liquidated damage. It should not be shown in the balance sheet and that too as a payable. If the same is payable then it amounts to advance received.

As suggested by experts colleague please elaborate your query.

[GUNASEKARAN K]

178/10/2022-GST. The circular mainly clarifies that liquidated damages are mere flow of money from party who causes a breach of contract to party who suffers loss due to such breach, then such payments do not constitute consideration for supply and are not taxable.

As per experts suggestion, please elaborate your query to help to understand the intention for show the amount as Payable Account will not be "Liquidated Damage".

[kara linda]

Works Contracts are classified in Schedule 2 as Services. Hence any advances received against providing works contract services slope unblocked are liableThe tax on the supply must be paid at the time of receipt of the advance payment. The tax must be paid even if the supply is made in the next financial year., thus the SAC code for Work Contracts is 9954. However, the GST rate for works contract related to construction or building of a unit intended for the purpose of sale is 12%

[Padmanathan KV]

As advised by Amit Ji, it is best to consult an expert who can review the contract documents and actual nature of the amount which you have mentioned as "loss of project" received before arriving at the conclusion.

Any advice without knowing into full facts and without looking into the documentation will not do any good to you or your client.

Broadly speaking, if the amount received is in nature of compensation and it is not the main objective of the contract, then GST may not be payable. These facts has to be established only by reviewing the whole documentation to ascertain the main objective of the contract and whether this "loss of project" just compensation.

[KASTURI SETHI]

The best advice by Sh.Padmanathan Kollengode Ji.

I further add that compensation is not income and hence cannot be consideration but subject to the terms and conditions of the contract. The terms and conditions will be determinant factor.

AI Summary

GST on advance payments and compensation: taxability depends on characterization as supply or liquidated damages. GST applicability depends on whether the receipt is an advance constituting consideration for a future supply-taxable at receipt-or a compensation/liquidated-damage payment that is not consideration and thus may be outside GST. Contract terms, settlement documentation and factual characterisation are determinative; works contracts are treated as services and advances against them generally attract tax unless bona fide compensation is established.