The Ministry of Finance (MoF) on August 03,2022, issued a notification regarding 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.
The following have been stated namely:
• Agreeing to the obligation to refrain from an act
o Example of activities that would be covered by this part of the expression would include non-compete agreements, where one party agrees not to compete with the other party in a product, service or geographical area against a consideration paid by the other party.
o Another example of such activities would be a builder refraining from constructing more than a certain number of floors, even though permitted to do so by the municipal authorities, against a compensation paid by the neighbouring housing project, which wants to protect its sunlight, or an industrial unit refraining from manufacturing activity during certain hours against an agreed compensation paid by a neighbouring school, which wants to avoid noise during those hours.
• Agreeing to the obligation to tolerate an act or a situation
• This would include activities such a shopkeeper allowing a hawker to operate from the common pavement in front of his shop against a monthly payment by the hawker, or an RWA tolerating the use of loud speakers for early morning prayers by a school located in the colony subject to the school paying an agreed sum to the RWA as compensation.
• Agreeing to the obligation to do an act
• This would include the case where an industrial unit agrees to install equipment for zero emission/discharge at the behest of the RWA of a neighbouring residential complex against a consideration paid by such RWA, even though the emission/discharge from the industrial unit was within permissible limits and there was no legal obligation upon the individual unit to do so.
The following are the important examples of cases related to Service Tax/GST, namely:
• Liquidated damages paid for breach of contract
• Compensation given to previous allottees of coal blocks for cancellation of their licenses pursuant to Supreme Court Order
• Cheque dishonour fine/penalty charged by a power distribution company from the customers
• Penalty paid by a mining company to State Government for unaccounted stock of river bed material
• Bond amount recovered from an employee leaving the employment before the agreed period
• Late payment charges collected by any service provider for late payment of bills
• 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.
[Circular No. 178/10/2022-GST]
