The CBIC released Circular No. 178 on August 3, 2022, which clarified the issues surrounding the application of GST to various types of declared services that became subject to service tax for the first time on July 1, 2012. These concern liquidated damages, compensation, different categories of cancellations, compensation for not recouping toll fees, etc.
The major clarifications are in respect of :
1) Declared services (Para 2.6)
2) Liquidated damages (Para 7.1)
3) Cheque dishonor fine / penalty (Para 7.3)
4) Penalty for law violation (Para 7.4) Ads by
5) Salary forfeiture (Para 7.5)
6) Compensation for non-collecting of additional toll charges (Para 8)
7) Late payment fee/ surcharge (Para 9)
8) Cancellation charges for hotel, event, journey, etc (Para 11)
To clarify various issues and changes relating to declared services that resulted from the 47th GST Council meeting and subsequent amendments notified by CBIC, CBIC (TRU) has issued Circular No. 178/10/2022-GST.
The gist of the clarifications is as follows:
1) Declared service
Paragraph 5 (e) of Schedule II of the CGST Act specifically states that “agreeing to the obligation to refrain from an act, to tolerate an act or a situation, or to do an act” qualifies as a supply of services under the GST Act.
It contains:
- Accepting the requirements to refrain from doing something
- Accepting the duty to put up with a behavior or circumstance
- Accepting the duty to perform a task
- For there to be a taxable supply, there must be an express or implied, oral or written agreement to do or refrain from doing something in exchange for payment of consideration for doing or refraining from such an act. It is impossible to imagine or assume that an agreement to perform an act, refrain from performing an act, or tolerate an act or a situation already exists just because money is being transferred from one party to another.
- It cannot be assumed that a payment was made for performing an act, refraining from performing an act, or tolerating an act or situation unless there is an express or implied promise by the recipient of the money to agree to do or abstain from doing something in exchange for the money paid to him.
- Such payments will not constitute “consideration” and, consequently, such activities will not constitute “supply” within the meaning of the Act unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity of tolerating an act.
2) Liquidated damages
- The compensation that would be due in the event of a contract breach is frequently specified in the contract itself by the parties entering into it. Liquidated damages are such compensation specified in a written contract for breach or non-performance of the contract or parties to the contract.
Liquidated Damages are described as cash compensation agreed to by a signed, written contract for breach of contract, payable to the aggrieved party, in Black’s Law Dictionary.
- When the amount paid as “liquidated damages” is an amount paid only to compensate for the injury, loss, or damage suffered by the aggrieved party due to a breach of the contract and there is no express or implied agreement by the aggrieved party receiving the liquidated damages to refrain from, tolerate, or do anything for the party paying the liquidated damages, in such cases liquidated damages are merely a flow of money from the party who causes the breach of the contract These payments are not taxable and do not count as consideration for a supply.
- Examples of these situations include losses brought on by property damage, negligence, theft, unauthorized use of a trading name, copyright, etc.
- As a result, even though they may be referred to as a fine or penalty, these payments actually constitute consideration for a supply and are therefore subject to GST when the supply in question is taxable. These supplies may be valued as the principal supply because they are incidental to the primary supply for which the contract was signed. Naturally, if the principal supply is exempt, such payments will not be subject to taxation.
3) Compensation for cancellation of coal blocks
- The compensation received for canceling coal blocks in accordance with a Supreme Court order is not taxable.
4) Cheque dishonor fine / penalty
- The fine or penalty that the supplier or a banker imposes for the dishonor of a check is a fine or penalty imposed for not tolerating, penalizing, and thereby deterring and discouraging such an act or situation, rather than for tolerating the act or situation.
- The fine or penalty for cheque dishonor is not taxable and is not a consideration for any service.
5) Penalty imposed for violation of laws
- Penalties imposed for breaking laws like traffic regulations, pollution standards, or other laws are not considered a consideration for any supplies received and are not subject to taxation.
- There is no contract between the government and the offender that states the violation will be permitted or will be permitted in exchange for a fine or penalty.
- Further clarification can be found in Circular No. 192/02/2016-Service Tax, dated April 13, 2016, which states that fines and penalties assessed by the government or a local authority for breaking a law, bylaw, rule, or regulation are not subject to the service tax. The GST falls under the same category.
6) Forfeiture of salary or payment of bond amount etc.
- The employment contract includes clauses that prevent non-serious applicants from accepting a position by providing for salary forfeiture or bond amount recovery in the event that the employee leaves the employment before the minimum stipulated period.
- In exchange for paying such sums, the employer gives the employee nothing in return.
- These sums that the employer receives in exchange for agreeing to put up with an action or a circumstance are not taxable.
7) Compensation for non-collections of toll charges
- The service that toll operators provide is access to a road or bridge, with toll charges serving as merely a consideration for that service, as was made clear in Circular No. 212/2/2019-ST dated 21.05.2019.
- The service of providing access to a road or bridge continued to be offered from 8.11.2016 to 1.12.2016 without the collection of a toll from users. The project authority gave it thought. It doesn’t necessarily mean that the service has changed because consideration for this time period for the same service came from someone other than the actual user of the service.
8) Late payment surcharge or fee
- A facility provided by the supplier that comes naturally packaged with the primary supply is the ability to accept late payments with interest or late payment fees, fines, or penalties.
- It should be assessed at the same rate as the principal supply because it is ancillary to and inherently bundled with the principal supply, such as electricity, water, telecommunications, cooking gas, insurance, etc. The same cannot be said, however, of the fine or penalty for cheque dishonor.
9) Fixed capacity charges for power
- A minimum fixed charge (or capacity charge) and a variable per unit charge make up the price of electricity that is imposed on consumers by State Electricity Boards (SEBs)/DISCOMS or by SEBs/DISCOMS from power companies.
- Regardless of how much electricity is scheduled or purchased by SEBs, DISCOMS, or individual customers during a month, the minimum fixed charges must be paid.
- Since electricity is exempt from GST, both the minimum fixed charges/capacity charges and the variable/energy charges that are charged for the sale of electricity are not taxable. There may be clauses in power purchase agreements stating that the power producer is not allowed to sell electricity to a third party without the buyer’s consent. These agreements are ancillary; the contract is primarily for the supply of electricity. They ensure an assured supply of power to State Electricity Boards/DISCOMS.
10) Cancellation charges
- When a customer doesn’t show up to use a service at the scheduled location and time, the service may be canceled by the customer or may not go as planned. Examples include booking hotel accommodations, tickets to an event, or travel arrangements.
- The supplier may keep all or a portion of the consideration, security deposit, or earnest money paid by the customer for the intended supply if the customer fails to show up to use the service.
- If a customer fails to use the travel, tour operator, hotel accommodations, or other intended supplies, the amount forfeited in the case of a non-refundable air ticket, security deposit, or earnest money forfeited should be assessed at the same rate as applicable to the service contract, such as air transport or tour operator service, or other similar services.
- Earnest money forfeited in connection with bids is treated as a simple flow of funds and is therefore not taxable as a consideration for any supply.