Lack of clarity on GST paid on liquidated damages may lead to litigation

The government has clarified the applicability of the goods and services tax (GST) on various items, but its silence on the tax paid on liquidated damages in the past could lead to litigations.

For transactions conducted from July 1, the Central Board of Indirect Taxes and Customs (CBIC) has clarified that there will be no on liquidated damages — these are payments made by a supplier of goods or services to the receiver in case of breach of contract or delay in executing a contract.

Earlier, it was a stated position that the liquidated damages paid to the government are exempt from . But there was no clarity on liquidated damages paid to private parties.

As such, many players paid at the rate of 18 per cent on liquidated damages paid by the supplier. On that, they received refunds or the other party got input tax credit, depending on the nature of the supply. There is fear now that such entities may be asked to reverse their (ITC) or pay back refunds, says Saurabh Agarwal, tax partner at EY.

For instance, if an aviation player in India asks for a delivery of aircraft from a foreign player and the latter delays the delivery, there would be liquidated damages for that delay. Many players had paid GST on those liquidated damages and later claimed refunds for them.

There is also the added fear that the refund claims lying with the GST authorities will be stuck, he said.

Generally, GST on liquidated damages was paid by players who have huge pending ITC, such as in the aviation industry, because of losses suffered by them and those who face inverted duty structure. Inverted duty structure refers to a tax structure where taxes on final goods are less than those in inputs. Such entities utilise their to pay GST and then claim refunds.

Agarwal said the CBIC should have clarified the position on the past GST too as it did in case of parlours.

The Board clarified that the 18 per cent GST will not take retrospective effect in case of these parlours. In the same manner, the CBIC should have clarified that the GST paid on liquidated damages in the past would be refunded or the refunded money would not be asked to be paid back in case of exports, and claims will not be asked to be reversed in case of domestic transactions, experts said.

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