MANU/GSCU/0016/2022

Ministry : Ministry of Finance

Department/Board : Central Board of Indirect Taxes and Customs

Circular No. : 178/10/2022-GST

Date : 03.08.2022

Notification/ Circulars Referred : Circular No. 192/02/2016-Service Tax, dated 13.04.2016 MANU/DSTX/0028/2016;Circular No. 212/2/2019-ST dated 21.05.2019 MANU/DSTX/0003/2019

Citing Reference:
Circular No. 192/02/2016-Service Tax, dated 13.04.2016 MANU/DSTX/0028/2016  Referred

Circular No. 212/2/2019-ST dated 21.05.2019 MANU/DSTX/0003/2019  Referred

To,

The Principal Chief Commissioners/Chief Commissioners/Principal Commissioners/Commissioner of Central Tax (All)/
The Principal Director Generals/Director Generals (All)

Madam/Sir,

GST applicability on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law

1. In certain cases/instances, questions have been raised regarding taxability of an activity or transaction as the supply of service of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act. Applicability of GST on payments in the nature of liquidated damage, compensation, penalty, cancellation charges, late payment surcharge etc. arising out of breach of contract or otherwise and scope of the entry at para 5(e) of Schedule II of Central Goods and Services Tax Act, 2017 (hereinafter referred to as, "CGST Act") in this context has been examined in the following paragraphs.

2. "Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act" has been specifically declared to be a supply of service in para 5(e) of Schedule II of CGST Act if the same constitutes a "supply" within the meaning of the Act. The said expression has following three limbs:-

a. Agreeing to the obligation to refrain from an act-