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 GST 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 GST. But there was no clarity on liquidated damages paid to private parties.
As such, many players paid GST 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 input tax credit (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.
Generally, GST on liquidated damages was paid by players who have huge pending ITC, such as in the aviation industry, because of losses suffered by them and those who face inverted duty structure. Inverted duty structure refers to a tax structure where taxes on final goods are less than those in inputs. Such entities utilise their ITC to pay GST and then claim refunds.
Saurabh Agarwal, Tax Partner, EY said that GST on liquidated damages was generally paid by companies in a situation where the ITC 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 ice cream by ice cream 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.