GST on liquidated damages, compensation and penalty out of breach of contract

 

 

CBIC has examined the Applicability of GST on payments in the nature of liquidated damage, compensation, penalty, cancellation charges, late payment surcharge etc. arising out of breach of contract or otherwise and scope of the entry at para 5 (e) of Schedule II of Central Goods and Services Tax Act, 2017.

Some of the important examples of such cases are Service Tax/GST demands on –

 

i. Liquidated damages paid for breach of contract;

 

ii. Compensation given to previous allottees of coal blocks for cancellation of their licenses pursuant to Supreme Court Order;

 

iii. Cheque dishonour fine/penalty charged by a power distribution company from the customers;

 

iv. Penalty paid by a mining company to State Government for unaccounted stock of river bed material;

 

v. Bond amount recovered from an employee leaving the employment before the agreed period;

 

vi. Late payment charges collected by any service provider for late payment of bills;

 

vii. Fixed charges collected by a power generating company from State Electricity Boards (SEBs) or by SEBs/DISCOMs from individual customer for supply of electricity;

 

viii. Cancellation charges recovered by railways for cancellation of tickets, etc.

 

The clarification has been issued on:

(a) Liquidated Damages

(b) Compensation for cancellation of coal blocks

(c) Cheque dishonor fine/ penalty

(d) Penalty imposed for violation of laws

(e) Forfeiture of salary or payment of bond amount in the event of the employee leaving the employment before the minimum agreed period

(f) Compensation for not collecting toll charges

(g) Late payment surcharge or fee

(h) Fixed Capacity charges for Power

(i) Cancellation charges