GST UPDATE NO. 81ST ON TAXABILITY OF FORFIETED AMOUNT:-

The taxability of amount forfeited on account of breach of terms and conditions of contract has been a matter of dispute since Service Tax Laws and the confusion is prevalent in the GST era as well. There have been divergent views on the taxability of amount forfeited, also called as liquidated damages under the service of ‘tolerate to do an act’. However, levying tax on compensation charged for default in complying with contractual obligations seem to be improper as the intention of the parties was never to breach the conditions of contract. Ideally, tax should be levied only when there is express intention to provide such service such as in case of non-compete agreements but advance rulings follow pro-revenue approach. The present update seeks to discuss the advance ruling pronounced recently and the contrary clarification issued by CBIC. Firstly, reference is made to the decision given by Gujarat AAR in the case of M/s Fastrack Deal Comm Pvt. Ltd. [Advance Ruling No. GUJ/GAAR/R/58/2020 dated 30.07.2020] wherein the issue involved was whether security amount forfeited for breach of contract for sale of land is liable to GST or not. It was contended that since sale of land is not treated as supply as per Schedule III of GST Act, 2017, the forfeiture of advance pertaining to sale of land should also not be liable to GST. However, the AAR held that the amount forfeited is covered under the ambit of clause 5(e) of the Schedule II which reads as follows:- (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; Accordingly, it was concluded that the forfeited amount is liable to GST. Now, coming to decision taken by the GST Council in its 45th meeting recently convened and the consequent clarifications issued thereon. With respect to overloading charges at toll plaza, it has been clarified that overloaded vehicles are allowed to ply on the national highways after payment of fees with multiplying factor of 2/4/6/8/10 times the base rate of toll. Therefore, it is clarified that overloading fees is equivalent to higher toll charges and will remain exempt from tax. The above clarification is beneficial but it appears to be contrary to the advance ruling discussed above. The overloading charges are similar to penalty for not complying with the rules of plying and are in the nature of compensation/damages in layman language. Consequently, if the view of advance ruling is considered, overloading charges should also be liable to GST as exemption is being provided to toll charges. However, when vehicle breaches the rules of highway, the overloading charges are compensation to tolerate the act of breach and so should be liable to GST under clause 5(e) of the Schedule II of CGST Act, 2017 but it is not so. Hence, in our opinion, the advance ruling discussed needs to be re-visited and challenged before the AAAR.

Comments

GST UPDATE NO. 81ST ON TAXABILITY OF FORFIETED AMOUNT:-

Post a Comment

Query