Mumbai-based Authority of Advanced Ruling (AAR) for the goods and services tax (GST) has held that payment made on account of ‘liquidated damages’ will attract an 18% GST as it is an independent levy which can’t be treated as reduction of the contract price. Tax experts said the ruling would hurt contractors, especially those engaged in supplying exempted services and may lead to litigation.
‘Liquidated damages’ is usually a part of contracts and is considered as a penalty on a contractor who is responsible for delays in handing over the project to the client. This clause is generally seen in building contracts, where liquidated damages are recovered from a contractor if he fails to achieve completion by the agreed date. It is calculated on a daily or weekly rate and can also be charged for some other contractual non-compliance.
Abhishek Jain, tax partner at EY India, said: “While the ruling corroborates the view of revenue authorities (who have been contending a service tax levy on similar lines), it may entail opening of a series of litigation for industry players who have taken a no-tax position on such recoveries.”
The ruling indicates that tax officials at the helm are working only in the interest of revenue rather than being fair and just to taxpayers, Rajat Mohan, partner at AMRG & Associates, said. He added that the taxability of ‘liquidated damages’ charges was bound to witness more litigation as taxpayers and taxman were unlikely to agree with the ruling.
The AAR ruling was in the context of the petition filed by the Maharashtra State Power Generation Company.