Yes, the refund claim under GST for tax and ITC is allowed fulfilling all the requirements embe...
Liquidated damages are a common term used by the parties under a contract. Concerning the implication of indirect taxes, both in the previous law and also the present GST law, there has always been an issue on the taxability of the liquidated damages, and the Government has never clarified this issue. Liquidated Damages are charged for Non-Performance or Breach of Contract or Late Delivery of Supplies etc. According to S 7(1) (d) of the GST Act consists of activities which are referred to in Schedule II within the scope of supply. Entry 5(e) declares that amount of service will be treated as agreeing to accountability to exempt from an act, or to tolerate an act or a situation, or to do an act.
According to Black’s Law Dictionary -Liquidated damages are a fixed amount contractually specified as a reasonable estimate of actual damages to be recovered by one party in case the other party breaches the contract. If the parties in a contract have properly settled the amount of liquidated damages, the sum fixed is the measure of damages for breach of contract, it does not matter if the actual damages is more than or less than the fixed damage amount. The difference between penalty and substantial liquidated damages is difficult to apply.
The main essence of a contract is performance. The parties in contract generally include their expectation in terms of damage, which is caused by the failure of either party to perform its duty as per the terms in the agreement. The contract may mention the costs for deficiency in the performance of a contract, which is known as ‘liquidated damages.’ It is to deter unsatisfactory performance or non-performance of a contract. For instance, a contract mentions in its clauses that time is the essence in the contract, then any delay would invite liquidated damages fixed in the contract.
Liquidated damages, which are also referred to as liquidated and ascertained damages, are those damages of which the amount is fixed by the parties during the formation of a contract. The injured party in the contract can collect the compensation upon a specific breach. The clauses of liquidated damages are used in various types of contracts like Construction contracts or IT. The liquidated clause in a contract provides certainty to the parties. It also assists in the recovery of the amount breached by avoiding the requirement of the proof of loss. Liquidated damages simplify the procedure relating to any types of disputes and may persuade the performance of a contract. The liquidated damage clause regulates the right of the parties after the breach of contract.
Unliquidated damages are not a pre-fixed or determined amount. A claim for unliquidated damages is generally governed by common law. Whenever the amount of damages is not decided in advance, then the amount to be recovered must be agreed or determined by a court or tribunal in the event of breach.
The view which supported levy of tax on liquidated damages is based on the principle that the party has tolerated the non-performance of the contract.
In Notification number 25/2012, entry 573-Service Tax, 20th June, 2012 offered for exemption with respect to the Services given by the Government or a local authority for non-performance of a contract for which compensation in the form of fines or liquidated damages is payable to the Government or local authority as per the agreement.
The GST Act continued with the same scheme for taxation and exemption according to the Service Tax law.
As perEntry 5(e) in Schedule II of the GST Act is similarly worded and declares that “agreeing to the obligation or to refrain from an act, or to tolerate an act or a circumstance, will be treated as supply of service.
The Notification number 12/2017-Central Tax (Rate) dated 28th June, 2017 provides for exemption from tax. The appropriate entry in the Notification reads as below:
|Serial No.||Heading||Description of Services||Rate (Percent)|
|77||Heading 9991 or Heading 9997||Services provided by the Central Government or State Government or Union territory or local authority by tolerating non-performance of a specific contract for which consideration in the form of fees or liquidated damages is payable to the Central or State Government or Union territory or local authority under such contract||18%|
The matter on this case was on applicability of GST on Liquidated damages the on the outline, “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act,” mentioned in schedule II, para 5 in clause (e) of the GST Act.
In this case, the authority held that GST on liquidated damages would be levied by observing the following facts:
This Ruling also impacts many other similar transactions.For instance, if a builder forfeits a buyer’s earnest money after the buyer fails to buy a flat in a contracted period, GST will be levied on that forfeited amount since the builder has ‘tolerated your act’ of not paying the full amount. Therefore, it becomes a ‘deemed service,’ and GST is due.
Hence, GST applies on
By way of exception clause, the presence of levy of GST on Liquidated damages cannot be denied:
The taxpayer, in this case, made certain payments to SEBI as per a scheme framed by SEBI to regularise default of certain disclosures as prescribed in SEBI Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The tribunal here held that such payments could not be said to be a penalty as per section 15A of the SEBI Act; hence it is not hit by explanation to section 37(1) of the Income-tax Act, 1961.
The taxpayer here made a short payment of margin money to the stock exchange. The assessee paid the penalty charged by the stock exchange during the period under consideration. Here It was held tribunal held that the payment had been made in the stock exchange on account of short payment of money. Payment made here is only a compensatory payment as per the rules of the stock exchange which is permittable as revenue expenditure as the same is not for infraction of the law.
In this case, the Government of Gujrat had introduced a Gold Card scheme according to which carrying of excess load in the vehicle was permitted on payment of some additional fees fixed in the given gold card. The assessee here was charged for overloading regularly. The tribunal here held that such fees were compensatory in nature and not a penalty. Payment of these fees empowered the transporters to carry overloaded trucks to the final destination without stopping them from unloading the excess weightage from the vehicles. The fact that excess weight was not needed to be unloaded shows that payment made under the scheme was not penal as no Government machinery encourages violation or infringement of legal provisions. Expenditure incurred was allowed as deduction.
Schedule II of the GST Act was expected to be a mere authoritative declaration as to the nature of the activity, whether it involves the supply of goods or services. The Lok Sabha on 9th August, 2018 had passed four amendment bills relating to GST. Section 7 of the CGST Act defines ‘supply’ which was amended on 1st July, 2017 itself. Sub-section (1A) was inserted in section 7(d) .Hence the role of Schedule II is limited to classification of supply as goods or services. For charging tax on liquidated damage, the transaction must first pass the test of supply, which appears to be a difficult job. Previous service tax law, on the introduction of a negative list on taxation, declared activity of agreeing to an obligation to refrain from doing an act/to tolerate an act or a situation/ to do an act’, to perform as a service. The present GST law does not make any such declaration. It merely divides supply as ‘goods’ or ‘services.’ Though the levy of tax on these activities was not free from doubt in service tax law, under GST, it is more doubtful as there is no such statutory declaration. Liquidated damages may hardly satisfy the essentials of supply of service.
Liquidated damages are treated as services for the purpose of GST.No specific schedule has been given for tax or exemption. The applicable rate of GST on liquidated damages is 18%. It is on the courts to decide whether to apply liquidated damages or penalty for breach or non –performance of a contract where the terms of a contract specify the terms of an agreement. It can be treated as both penalty or damages.