18% GST Levy on Amount Gained by Liquidated Damages: TG AAR

The Telangana Authority for Advance Ruling (AAR), where the members B. Raghu Kiran and S.V. Kasi Visweswara Rao stated that the 9% GST will be levied under the Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST) Act for the liquidated losses revamped by the petitioner in relation of late commissioning as per the agreement comprises of supply beneath the GST compliance.

The petitioner is involved in the production and distribution of electricity obtained from solar energy and has come under an agreement with the firm for the construction of the solar power project. The agreement clause furnishes the liquidated losses in late commissioning and delivery of the contract. The petitioner in its application to AAR questioned as to the damages liquidated are liable to be recoverable from him or not because of late commissioning of the project is liable for tax beneath the GST compliance.

AAR ruled that as per the laws of section 55 of the Indian contract act 1872 “that failure to perform the contract at an agreed time rendered the contract voidable at the option of the aggrieved party.” In another way, these parties can revamp the compensation for the losses via non-performance. The AAR held that currently, the liquidated losses availed by the applicant for the late commissioning beyond the set time beneath the agreement “constituted a consideration for tolerating an act or a situation arising out of contractual obligations, and hence they were taxable since they fell under Entry 5 (e) of Schedule II of the CGST Act, 2017.”

Specifying that the CGST and Telangana GST act provisions are identical excluding the specific provisions the AAR sees that beneath the CGST act the term consideration concerning the supply of the goods or services or both consists of the financial value of the act of patience. AAR held that the same patience of the act or the case beneath the agreement comprises of the supply of services beneath the act creating the money value or consideration of this patience liable for GST.

“Further Section 2(31)(b) of the CGST Act mentions that consideration in relation to the supply of goods or services or both includes the monetary value of an act of forbearance. Therefore such toleration of an act or a situation under an agreement constitutes a supply of service and the consideration or monetary value of such toleration is exigible to tax.”

After seeing the contract in the case itself mentioned the decision date and the payment of liquidated losses AAR (Authority for Advance Rulings) held that the decision date of the liquidated losses under the formula mentioned in the contract will be the duration of the supply of these services.