Karnataka GST AAR: Tax on Damages Received by Tenants Upon Termination of Sublease Agreements

The Karnataka Authority for Advance Ruling (AAR, Karnataka) has ruled that GST applies to damages received by the tenant upon the early termination of a sublease agreement.

M/s. Enzyme Business Center, situated at Plot 1546 and 1547, 19th Main Road, HSR Layout, Bengaluru-560 102, submitted an Advance Ruling application under Section 97 of CGST Act, 2017 read with Rule 104 of CGST Rules, 2017 and Section 97 of KGST Act, 2017 read with Rule 104 of KGST Rules, 2017 through FORM GST ARA-01. Each act requires Rs. 5000 as a discharging fee.

Read Also:- Karnataka AAR: The Usage of Gold as an Incentive Will Attract GST

The Questions and Rulings are Given Below:

Question 1:- Do the damages received by the applicant, totalling Rs. 1,85,00,000, from the tenant for terminating the sublease before the lock-in period as per the agreement dated 03/11/2021 and 11/01/2022, qualify as a supply under Section 7 of the Central GST Act, 2017?

Should the amount received against damages of 1,85,00,000 as per the settlement agreement dated 18-04-2023, be determined as consideration for the aforementioned supply.

Answer: As per the ruling, the damages received by the applicant from the tenant for terminating the sublease before the agreed lock-in period as per the subleased deed agreement are considered a supply under Section 7 of the Central GST Act, 2017. The amount received as damages, as specified in the settlement agreement, should be regarded as consideration for this supply.

Recommended:- KAAR: No ITC for Expenses Beyond GST for Under-Construction Apartments/ Flats

Question 2: If the answer to the previous question is affirmative, what is the applicable GST rate and the appropriate classification/SAC for GST payment?

Answer: The services offered by the applicant fall within Chapter heading 9972 and are subject to GST at a rate of 18% (9% CGST and 9% SGST).