You are here: Home » Economy & Policy » News
Business Standard

Lack of clarity on GST paid on liquidated damages may lead to litigation

There is fear that entities may be asked to reverse ITC or pay back refunds, experts say

Goods and Services Tax | ITC | Indian Economy

Indivjal Dhasmana  |  New Delhi 

Lack of clarity on GST paid on liquidated damages may lead to litigation

The government has clarified the applicability of the goods and services tax (GST) on various items, but its silence on the tax paid on liquidated damages in the past could lead to litigations.

For transactions conducted from July 1, the Central Board of Indirect Taxes and Customs (CBIC) has clarified that there will be no on liquidated damages — these are payments made by a supplier of goods or services to the receiver in case of breach of contract or delay in executing a contract.

Earlier, it was a stated position that the liquidated damages paid to the government are exempt from . But there was no clarity on liquidated damages paid to private parties.

As such, many players paid at the rate of 18 per cent on liquidated damages paid by the supplier. On that, they received refunds or the other party got input tax credit, depending on the nature of the supply. There is fear now that such entities may be asked to reverse their (ITC) or pay back refunds.

For instance, if an aviation player in India asks for a delivery of aircraft from a foreign player and the latter delays the delivery, there would be liquidated damages for that delay. Many players had paid GST on those liquidated damages and later claimed refunds for them.

There is also the added fear that the refund claims lying with the GST authorities will be stuck.

Saurabh Agarwal, Tax Partner, EY said that GST on liquidated damages was generally paid by companies in a situation where the was available to the service recipient or companies having huge accumulated ITC, such as in the case of sectors suffering inverted duty structure or companies having losses. This was done to avoid undue litigation on such an interpretational issue of law, as there was no additional cost to the business houses. Inverted duty structure refers to a tax structure where taxes on final goods are less than those in inputs.

Agarwal welcomed the clarifications made by CBIC which comes with an intent to avoid litigations on some of the interpretational issues of law. He added that some of the circulars also clarify that no actions should be taken by the department for the past period viz. in case of sale of by parlour, GST on churi, khandi and like items used as cattle feed, etc. He highlghted that a similar clarification by CBIC by providing immunity to assesses for the past positions wrt GST paid on liquidated damages would help in bringing certainty of taxation.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Thu, August 04 2022. 15:16 IST