State appellate body upholds GST on liquidated damages : 22-09-2018

In a ruling that may have an impact on several construction and renovation contracts and contract cancellations, Maharashtra Appellate Authority for Advance Rulings (AAAR) has upheld a levy of GST on liquidated damages collected by a power generation firm for a delay in project completion.

Liquidated damages are fines levied by the owner of a project to the contractor in case of cancellation or delay of trial operation within the specified time period in the contract.

Maharashtra State Power Generation Company had approached the state authority against a ruling by the Authority for Advance Ruling (AAR) that had observed that GST will be levied on forfeiture of money.

AAR rulings can be challenged in a state’s appellate authority for advance rulings (AAAR), which has a commissioner each from state tax authority as well as central tax department.

After examining the contract between Maharashtra State Power Generation Company (owner) and Bharat Heavy Electricals (contractor) for the completion of Chandrapur main plant, the authority in its order noted that it agreed with AAR finding that GST would be applicable on liquidated damages. It also mentioned that the GST on liquidated damages will be at 18%.

It’s an issue that has been haunting tax authorities for many years, and now, this ruling will have an impact in many other contract cancellations situations. “This issue is an inheritance from the service tax era where, too, the revenue authorities have been arguing a levy of tax on the premise of it being ‘tolerance of an act’,” said Abhishek Jain, partner at EY. “Upholding a levy of GST by AAAR could open up a can of worms for various businesses who have adopted a no tax position on such recoveries; who may now have to take up this issue before higher courts,” he said.

The ruling also impacts consumer transactions. For example, 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. The government position is that the builder has ‘tolerated your act’ of not paying the full amount, therefore, it becomes a ‘deemed service’ and GST is due.

Experts said matters related to liquidated damages need more clarity. “It would help the Industry if this controversy is put to rest by way of suitable clarification,” said Suresh Nair, partner at EY. “Else this could be litigative, given that there is merit in the position that GST should not be levied thereof. The latest amendment to the GST law also could be read in favour of this interpretation,” he said.

On what will be considered as the time of supply — the delay period, or time when decision is taken to impose liquidated damages — the authority noted that the tax will be triggered when it’s been established that there has been a delay.

Source : PTI

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