GST UPDATE ON TAXABILITY OF LIQUIDATED DAMAGES PAID TO FOREIGN BUYER

GST UPDATE ON TAXABILITY OF LIQUIDATED DAMAGES PAID TO FOREIGN BUYER - 010/2020-21

Performance is the essence of a contract and hence parties to contract generally incorporate their expectation in terms of damage caused by failure of either party to perform its obligations completely or as per the agreed terms. The failure to perform an act can be compensated in any form like forfeiture of deposit, penalties, compensation, cancellation, demurrage or detention charges. All these can be said to be covered under the head ‘Liquidated damages’.

Under GST regime, the scope of supply is very wide and liquidated damages have also been covered in this definition in Paragraph 5 (e) of Schedule II of CGST Act 2017. The excerpt has been reproduced below

“(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a

situation, or to do an act;”

A few rulings given by AAR wherein liquidated damages are treated as supply are being listed below for your reference

1. M/s. Maharashtra State Power Generation Co. Ltd (AAR Maharashtra) No. GST-ARA- 15/2017-18/B-30; dt. 08/05/2018

2. M/s. North American Coal Corporation India Private limited (GST AAR Maharashtra); Advance Ruling No. GST-ARA-07/2018-19/B-63; 11/07/2018

3. Rashtriya Ispat Nigam Ltd (GST AAR Andhra Pradesh); Advance Ruling No. AAR 01/AP/GST/2019; 11/01/2019

4. M/s. Dholera Industrial City Development Project ltd. (GST AAR Gujarat); Advance Ruling No. GUJ/GAAR/R/2019/06; 04/03/2019

5. Bajaj Finance Limited (GST AAAR Maharashtra); Order No. MAH/AAAR/SS-RJ/24/2018-19; 14/03/2019

Moving a step forward, what shall be the GST implication in case where liquidated damages are being collected by the foreign buyer in case of breach of conditions of timely export? Whether such liquidated damages will be treated as import of service? Will the exporter be required to pay tax under reverse charge mechanism?

In order to find an answer to this question, it is pertinent to refer to the definition of import of service defined in Section 2(11) of IGST Act 2017.

“ ‘import of services’ means the supply of any service, where––

(i) the supplier of service is located outside India;

(ii) the recipient of service is located in India; and

(iii) the place of supply of service is in India;”

In order to qualify as import of service, all the three conditions are to be satisfied. Let us have a look at the provisions of Place of supply which is the third condition to be satisfied in order to qualify as import of service, as the first two conditions seem to be satisfied. Section 13 deals with the provisions of place of supply of service where the location of supplier or the recipient is outside India. As per the general clause of Section 13(2) of IGST Act 2017,

“The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services:”

Since the location of recipient is in India, the place of supply of service shall also be within India. On satisfaction of all the three conditions, it qualifies as ‘import of service’. Therefore, the exporter is required to pay CGST and SGST under reverse charge mechanism attracting GST rate of 18 % and having SAC Code as 9997.

“Right now the first and foremost priority of the entire humankind must be to plank the curve through self-isolation. Stay at home and be safe.”

Solely for educational purpose.

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GST UPDATE ON TAXABILITY OF LIQUIDATED DAMAGES PAID TO FOREIGN BUYER - 010/2020-21

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