GST implication on forfeiture of advance received

[Shambhavi Nayak]

One of our party received Rs 250000 amount as Advance. The goods was not lifted and the rate of goods suddenly went down and the amount was forfeited and shown as Income in Profit and loss.

Whether GST is applicable on this transaction.

[Sadanand Bulbule]

In terms of CBIC Circular No.178/10/2022-GST dated 03/08/2022, forfeiture of advance on account of non-lifting of goods is treated as a consequence of breach of contract and not as "consideration" under Section 2[31] for any independent "supply" under Section 7. Hence, such amount is not liable to GST.

[KASTURI SETHI]

NOT TAXABLE.

The forfeiture of advance amount is compensation and compensation can never be treated as income. Hence such amount is out of the meaning and scope of consideration. This activity is out of Schedule-II (5) (e) of CGST Act. Such activity is not covered under the phrase, refraining from an act or tolerating an act or situation or agreeing to the obligation but covered under NOT refraining from an act or tolerating an act or situation or agreeing to the obligation.

Forfeiture of advance amount is covered under NOT TOLERATING AN ACT OR SITUATION. Hence not taxable.

My reply is in agreement with Sh.Sadanand Bulbule, Sir.

[YAGAY andSUN]

The taxability of the forfeited advance is to be examined under the Central Goods and Services Tax Act, 2017 with reference to the concept of "supply".

Under Section 7, GST is leviable only where there is a supply of goods or services for a consideration. In the present case, no goods were ultimately supplied, as the contract was not executed.

However, attention must be drawn to Entry 5(e) of Schedule II, which treats as a supply of service: "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation". The department may contend that forfeiture of advance represents consideration for "tolerating" the buyer's failure to lift goods.

This issue now stands substantially settled by judicial and administrative clarity. It has been held that mere forfeiture of advance/earnest money due to breach of contract does not constitute a supply, as there is no independent agreement to tolerate an act; rather, it is a compensation/liquidated damages arising from non-performance.

Accordingly:

• The amount forfeited is in the nature of damages,

• There is no positive act of supply, nor any contractual intention to provide a service of tolerance,

• Hence, GST is not applicable on such forfeiture.

This position has been affirmed in various rulings and clarified by CBIC that liquidated damages, penalty, or forfeiture for breach of contract are not taxable, unless there is a separate and express agreement for tolerating an act.

Therefore, the forfeited advance of Rs. 2,50,000, duly recognized as income in the Profit & Loss Account, does not attract GST, being outside the scope of "supply" under Section 7.

[Shilpi Jain]

Amount forfeited due to breach of contract, no GST liable as there is no supply made for the amount that is being paid.

AI Summary

Forfeited advance not treated as supply; GST does not apply where forfeiture amounts to liquidated damages. Forfeited advances for non-lifting of goods, where no separate agreement to tolerate the buyer's failure exists, operate as liquidated damages and not as consideration for a supply; administrative guidance and rulings treat such forfeiture as consequence of breach and therefore not subject to GST absent an express contractual arrangement creating a tolerance service.