A much-litigated issue between the indirect tax department and businesses has received some clarity. The government has shared its view on the applicability of goods and services tax on liquidated damages or compensation, penalty, etc. received as a result of breach of contract.
Against this backdrop, Ritesh Kanodia, Partner at Economic Laws Practice (ELP) has been quoted by BQ Prime in their article titled ‘GST Relief for Breach of Contract, Damages’. He says, “The contention of the department has been that liquidated damages are nothing but a consideration towards tolerating an act, and such an act of toleration is a supply liable to the GST. So, the party paying the liquidated damages had to bear the GST in addition to the cost of damages, unless credit was available. Multiple litigations are ongoing on this issue since the service tax regime.” He is of the opinion that the clarifications are a welcome move and will be immensely helpful in resolving past litigations and avoiding demands on the issue in the future.
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