Head office and Branch office

Head office and Branch office

The 50th GST Council meeting had recommended to clarify through a circular that Input Services Distributor (ISD) mechanism is not mandatory for distribution of input tax credit of common input services procured from third parties to the distinct persons as per the present provisions of GST law, and also to clarify issues regarding taxability of internally generated services provided by one distinct person to another distinct person [such as branch offices of same entity]. 

The Council also recommended that amendment may be made in GST law to make ISD mechanism mandatory prospectively [for future] for distribution of input tax credit of such common input services procured from third parties.

It would do well to recollect at this juncture that in Schedule I to GST law, it sets out at entry 2 that the supplies between distinct persons would be deemed to be supplies, even when done without consideration.

Examples of distinct persons are branch offices in different states or being different GSTINs in same PAN. As per this entry, even when the offices of same legal entity bearing different GST registrations, make supplies of goods/services to each other, these are liable to GST on the supplies made between them. While there is a physical trail for the movement of goods between branches, tracking the services supplied has been challenging.

On the other hand, when the employees situated in one branch office were discharging functions to another branch of same entity, should it be taxed at entry 2 Schedule I at all as deemed supply between distinct persons or not? This confusion is due to Schedule III of GST has entry 1 services by employee to employer in course of employment are excluded from tax net, as neither a supply of goods nor of services. Where cross charge was done for supplies of services between branch offices, then there has been the confusion on the valuation of supplies, whether to add salary costs or not?

The advance ruling of Karnataka authorities in the case of Columbia Asia Hospitals Private Limited 2018 (15) G.S.T.L. 722 (A.A.R. - GST) approved in (2019 (20) G.S.T.L. 763 (App. A.A.R. - GST) would be important for reference here. In this case, it has been held that the services of employees working at corporate office to provide accounting, administration, and IT systems to other branches of the same company would be supplied liable for GST.

The ruling seemed to have erred as treating employee of the company as employee of particular branch or location.

Coming to ISD concept, "Input Service Distributor [ISD]"is an office of the supplier which receives tax invoices issued towards the receipt of input services and issues a document for the purposes of distributing the credit of tax paid on the said services to another branch office of same entity.

The credit on vendor invoices pertaining to specific recipient branches such as advertisement expense, is distributed to such branch. Common credit is distributed to the recipient branches, is distributed based on turnover basis.

There are many taxpayers who have not complied with ISD mechanism on the common expenditures incurred. Whether the credits were required to be distributed only under ISD mechanism or alternately could the vendor expenses at HO be cross charged, whether there could be excess/short distribution of credits were questions arising to assessee. Adding to this, taking the ISD registration and its compliance challenges have also been there.

In this backdrop, the latest circular 199/11/2023 was issued regarding ISD mechanism, tax on the input services procured by HO for branches as well as clarifying on services supplied between branch offices of entity in different states.

Whether head office [HO] can avail the ITC of common input services procured from a third party but attributable to Branch offices [BOs], and raise tax invoice to BOs for such input services, and the BOs can then avail the ITC for the same?

Yes. HO can opt to issue tax invoices to the concerned BOs in respect of common input services procured from third-party vendor by HO but attributable to the said BOs and the BOs can then avail ITC on the same [to extent used to make taxable supplies/zero rated supplies].

Is it mandatory for the HO to go under ISD mechanism to distribute ITC on common input services procured by them from a third party attributable to both HO and BOs or exclusively to one or more BOs?

Under present provisions of GST, it is not mandatory for the HO to distribute ITC by ISD route.

Such distribution of the ITC in respect common input services procured from a third-party vendor can be made by the HO to a BO through ISD only if the said input services are attributable to the said BO or actually been provided to the said BO.

Whether the HO is mandatorily required to issue tax invoice to BOs for internally generated services? Whether the cost of all components including salary cost of HO employees involved in providing the said services has to be included in the computation of value of services provided by HO to BOs when full input tax credit is available to the concerned BOs?

Vide the second proviso to Rule 28 of GST rules, in cases where full input tax credit is available to a BO, the value declared on the invoice by HO to the said BO in respect of a supply of services shall be deemed to be the open market value of such services. This is irrespective of the fact whether cost of any particular component of such services, like employee cost etc., has been included or not in the value of the services in the invoice.

If HO has not issued a tax invoice to the BO in respect of any particular services being rendered by HO to the said BO, where full ITC is available to the recipient, the value of such services may be deemed to be declared as Nil by HO to BO and may be deemed as open market value in terms of second proviso to rule 28 of GST Rules.

In respect of internally generated services provided by the HO to BOs, in cases where full input tax credit is not available to the concerned BOs, whether the salary cost of employees of the HO involved in providing said services is mandatorily required to be included while computing the value of the services provided by HO to Bos?

The cost of salary of employees of the HO, involved in providing is not mandatorily required to be included while computing the taxable value of the supply of such services, even in cases where full input tax credit is not available to the concerned BO.

Sum-up

What are internally generated services?

However rightly clarified circular that ISD is optional not mandatory. This was the correct view all along vide section 20(1) r/w 20(2) GST law, confirmed now in the latest circular.

Where assessee HO has cross charged for centrally procured services used to make supplies of services to branch offices, such as accounting/recruitment, this circular has removed doubts on denial of credit availed centrally on such expenses at HO.

Cross charge can be done by HO to branch office at any value when recipient branch can avail ITC. Valuation for such cross-charge u/r 28 of GST rules, is on open market value of same/similar services or cost plus 10%; Where recipient can avail full ITC, then invoice value [even nominal amount] is deemed to be the market value. Recipient Branch can avail full ITC when such inwards supplies from HO is attributed to its outward taxable supplies/exports/supplies to SEZ unit or developer.

For assessee who omitted to do cross charge during past 6 years, could certainly rely on this clarification citing that even when invoice not raised for supplies of service made, nil could be deemed as value of supplies made by supplier branch [no GST impact], when recipient branch was in position to avail credit.

Due to lack of clarity on including staff costs, and adverse ruling in Columbia Asia supra, employees’ costs formed a huge chunk of value of cross charge done to branch offices, leading to accumulated credit at recipient locations. The circular has clarified need not include employee costs in valuation, even when recipient provides exempt supplies and not in position to avail ITC.

This circular is a big relief in instances where dept during audit u/s 65, has been making inflated tax demands on supplies between branch offices, by including salaries/various expenses incurred at HO, even in cases where supplier DTA unit is making zero rated supplies of services, to recipient distinct person being SEZ unit of same legal entity and not required to charge GST at all!!

Note: It would do well to remember that circulars are binding on the department officers. Similarly held in Dhiren Chemicals Industries [2002 (143) ELT 19 (SC)].

How to address the following?

Whether the head office of XYZ Co Ltd, Bangalore which has procured common expenses such as audit fees, in 2022-23, benefitting all the 10 branches across India was compulsorily required to distribute credit through ISD?

No, it was not mandatorily required to distribute credit by taking ISD registration. It could have raised tax invoice, discharge tax as per the valuation mechanism set out in 28 of GST rules.

Based on market value of same/similar services or cost plus 10% or when recipient branch can avail ITC, any value declared in invoice would be deemed market value.

Whether the head office of XYZ Co Ltd, Bangalore which has procured software license from vendor, in 2022-23, benefitting 5 out of 10 branches across India was compulsorily required to distribute credit through ISD?

NO. They can raise cross charge invoice for the same.

When the head office of XYZ Co Ltd, Bangalore supplied accounting support services to its branches such as at Chennai and Gurgaon in 2021-22, whether it was required to cross-charge for such services, including salary costs of finance team employee?

It could take view that not liable to include salary costs, as such services by employees, was in course of employment, Schedule III entry 1.

When head office of Bangalore has supplied accounting support services to its branches at Chennai and Gurgaon in 2021-22, and raised tax invoices for cross charge in March 2023, when recipient branches provide taxable supplies, can such branches avail ITC?

 If invoice was not raised in 2021-22, and HO raised tax invoice in March 2023, for services supplied and completed in 2021-22, voluntarily paid GST. Interest liability could arise for delayed payment of taxes. Recipient can avail ITC of tax charged by the HO Bangalore.

Cross Charge-Centralized Billing for the following expenses, 

• Core/centralized accounting expenses 

• Top management expenses 

• Advertisement expenses Sales and marketing expenses 

• Finance charges, 

• Treasury administration expenses 

• Cash management expenses 

• Legal expenses and Audit fee (Statutory Audit, Internal Audit etc.)

• Tax/Management consultant fee 

• Royalty fee and License Fee

Going concern transfer

Going concern transfer

Sale of business as a ‘going concern’ [commonly called, lock-stock-barrel basis] is not taxable as per paragraph 4(c), schedule II of the CGST Act read with entry no. 2 to exemption Notification no. 12/2017- Central Tax (Rate) dated 28th June, 2017.

Schedule II of the CGST Act: It talks about activities that are treated as a supply of goods or services. Here clause 4 says that transfer of business assets is considered as supply of goods.

However, as per clause 4(c) transfer of a business as a whole and as a going concern is not considered as a supply of goods.

Notification No.12/2017- Central Tax (Rate): As per this notification, services by way of transfer of going concern as a whole or part thereof is exempt from GST.

By way of this notification, the Revenue has clarified that transfer of a business as a going concern is exempt from GST. But the term going concern is not defined anywhere under GST.

The notification says that the activity of business transfer as a going concern is considered as supply of service and the same is exempt from GST. Similarly, Schedule II of the CSGT Act excludes the transfer of a business as a going concern as the supply of goods but includes the transfer of business assets as the supply of goods.

From above, we can interpret that.

• Transfer of business assets- Considered as the supply of goods.

• Transfer of business- Considered as the supply of service.

• Transfer of business as a going concern- Considered as the supply of service and exempt from GST as per above notification.

Delhi High court ln re Indo Rama Textile Limited (2013) 4 Comp LJ 141 (Del). Para 27 of the said judgement reads as follows:

“Statement on Standard Auditing Practices (SAP) 16, “Going Concern”, issued by the Council of the Institute of Chartered Accountants of India, provides that” When a question arises regarding the appropriateness of the Going Concern assumption, the auditor should gather sufficient appropriate audit evidence to attempt to resolve, to the auditor’s satisfaction, the question regarding the entity’s ability to continue in operation for the foreseeable future.

It therefore appears that to qualify as a ‘going concern’, the business must not have ‘intention or necessity of liquidation or of curtailing materially the scale of the operations.

One may refer to rule 41 that permits the transferor to upload GST ITC 02 on the common portal for effecting a smooth transfer of all unutilised credits pursuant to a transfer as a ‘going concern’, without any condition of correlation with underlying inputs and / or capital goods.

This provision is not new and is an added measure of responsibility that transferee of business needs to be mindful of to ensure that unpaid liabilities (determined or not, subject to limitation under section 73, 74 or 76) cannot be forfeited on account of sale of business. 

However, where ‘sale of business’ is effected by ‘sale of assets’, transferee carries no liability under GST law as all dues will remain with the ‘Taxable Person A’. All recovery provisions against Taxable Person A will not travel to transferee as the business is left behind with Taxable Person A and only assets (on payment of applicable GST) have been transferred to Taxable Person B.

In case of transfer of business by whatever method i.e., sale, lease, gift, license etc., the law does not indicate as to what should be the life of capital goods that is to be reckoned in the hands of transferee, for the purpose of GST laws, would it be five years, as reduced by number of years for which such asset was put to use by the transferor or would it be an additional five years from the date of transfer or would it be as per the actual remaining life of the asset on the basis of actuarial valuation as on the date of such transfer. The GST law is silent on this issue. 

But the very nature of ‘going concern’ is the recognition of continuity of use of capital goods. Rules 43 and 44 would need to be complied without restarting the period of use applicable in these cases.

The person taking over the business of another person should, in the normal course as a matter of due diligence, make sure that all the tax liabilities due under GST (CGST & SGST / IGST) laws in relation to transactions made before the date of transfer is fully discharged with applicable interest due, if any. Further, such transferee shall also ensure that there is no pending proceeding(s) against him under the said Act, to ensure that the transition process is smooth. It must be noted that the GST law casts the burden of paying tax, interest, penalty or any other amount on the transferee jointly with the transferor of business, though such amounts could relate to a period, prior to the date of transfer.

Q1. In case of transfer of business, who is liable to pay tax in respect of business transactions prior to such transfer?

Ans. Both the transferor and transferee of business (either wholly or partly) are jointly and severally liable to pay tax.

Q2. Whether such liability as mentioned above is applicable only for tax?

Ans. Such liability is applicable to interest and penalty also in addition to tax.

Quick concerns

1. Transfer of employees?

2. Takeover of current net assets?

3. Conduct of business to ensure continuity?

4. Non-compete clause by seller?

5. Transfer of permission of licences?

No – E-way Bill Required under GST

No EWB is required to be generated in respect of exempt goods and specific cases covered under Rule 138(14). It may be noted that movement of goods exempted under Notification No.2/2017- Central Tax (Rate) dated June 28.2017 except de-oiled cake do not require EWB pursuant to Rule 138(14)(e) of CGST Rules. Moreover, movement of goods notified under

Clause (d) of Rule 138(14) of State/UT GST Rules will also be excluded under the Central GST Rules. 

This also acknowledges that State/UT GST Rules are stand-alone on the requirements of EWB in respect of intra-State movement and the Central GST Rules are limited only in respect of inter-State movement. EWB is not even required when there is a supply without any movement of goods (see section 10(1)(c) of the IGST Act, 2017).

For example, where goods move from a DTA unit to SEZ unit or vice-versa located in the same State, there will be no requirement to generate an e-way bill, if the same has been exempted by the particular State under rule 138(14)(d) of the CGST Rules. -Circular No. 47/21/2018-GST dated 28.06.2018.

Such exclusion from EWB is allowed to all kinds of goods, if the value is up to Rs.50,000 or the threshold prescribed (refer “Threshold - State EWB” heading in this Chapter) in the case of intra-State Supplies.

Care should be taken not to misapply the threshold limit prescribed by States for use of EWB to inter-State movement. This discretion enjoyed by States in prescribing exceptions (to the CGST Rules) is limited to movement within the respective State.

Summary of ‘no EWB’

(a) where the specified goods being transported. (LPG, Kerosene, postal bags, jewellery & precious stones, currency, used personal household, alcoholic liquor, petrol, diesel, fresh milk, vegetables, etc.,) 

(b) where the goods are being transported by a non-motorised conveyance

(c) where the goods are being transported from the customs port, airport, air cargo complex and land customs station to an inland container depot or a container freight station for clearance by

Customs

(d) in respect of movement of goods within such areas as are notified under clause (d) of sub-rule (14) of rule 138 of the State or Union territory Goods and Services Tax Rules in that particular State or Union territory

(e) where the goods, other than de-oiled cake, being transported, are specified in the Schedule appended to Notification No. 2/2017- Central tax (Rate) dated the 28th June, 2017

(f) where the goods being transported are alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas or aviation turbine fuel

(g) where the supply of goods being transported is treated as no supply under Schedule III of the Act

(h) where the goods are being transported— (i) under customs bond from an inland container depot or a container freight station to a customs port, airport, air cargo complex and land customs station, or from one customs station or customs port to another customs station or customs port, or (ii) under customs supervision or under customs seal

(i) where the goods being transported are transit cargo from or to Nepal or Bhutan

(j) where the goods being transported are exempt from tax under Notification No. 7/2017-Central Tax (Rate), dated 28th June 2017 and Notification No. 26/2017-Central Tax (Rate), dated the 21st September, 2017

(k) any movement of goods caused by defence formation under Ministry of defence as a consignor or consignee

(l) where the consignor of goods is the Central Government, Government of any State or a local authority for transport of goods by rail

(m) where empty cargo containers are being transported

(n) where the goods are being transported upto a distance of twenty kilometres from the place of the business of the consignor to a weighbridge for weighment or from the weighbridge back to the place of the business of the said consignor subject to the condition that the movement of goods is accompanied by a delivery challan issued in accordance with rule 55.

(o) where empty cylinders for packing of liquefied petroleum gas are being moved for reasons other than supply 

CSR expenditure under GST regime

 CSR expenditure under GST regime

Section 16(1) of CGST Act, 2017 provides that input tax shall be allowed on goods or services which are used or intended to be used in the course or furtherance of business. Further, Section 17(5) disallows credit on certain goods and services.

It is pertinent to note that the GST provisions do not specifically allow or disallow input tax credit on CSR expenses. Further, there is no explanation similar to what is available under the Income Act. Thus, one may take a view that credit is available under GST. However, department places reliance on clause (h) of section 17(5) to disallow CSR related credit which restricts ITC on goods given in the form of gifts.

Yes

M/S. BAMBINO PASTA FOOD INDUSTRIES PRIVATE LIMITED - 2022

(11) TMI 482 - AUTHORITY FOR ADVANCE RULING, TELANGANA

No

M/S. DWARIKESH SUGAR INDUSTRIES LIMITED - 2020 (1) TMI 1430

-AUTHORITY FOR ADVANCE RULING, UTTAR PRADESH

M/S. ADAMA INDIA PRIVATE LIMITED- 2021 (9) TMI 1061 – AUTHORITY FOR ADVANCE RULING, GUJARAT

M/S. POLYCAB WIRES PRIVATE LIMITED - 2019 (4) TMI 111 – AUTHORITY FOR ADVANCE RULINGS, KERALA

Considering this confusion on ITC eligibility, the Government decided to introduce amendment in Section 17(5) of the CGST Act, 2017

Finance Bill, 2023

The Government inserted clause (fa) in Section 17(5) of the CGST Act, 2017 which reads as under:

Section 17(5). Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely: -

“(fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013;”

The amendment states that input tax credit on goods and services received by companies to undertake CSR activities under section 135 of Companies Act, 2013 is not allowed. The amendment will come into effect from the date to be notified.

Potential issues in the amendment

i. Whether companies can take credit of procurements made until this new provision is notified?

ii. What is the scope of the phrase “activities relating to his obligations under CSR”?

iii. What is the meaning of the phrase “intended to be used”?

iv. Whether credit is allowed if CSR expenditure is incurred by the Company over and above the mandatory threshold?

v. Whether credit is allowed if CSR expenditure is incurred by partnership firm, etc.?

Accounts and other Records Under GST

 

Accounts and other Records Under GST

Section 35 of Central Goods and Services Tax Act 2017 - Accounts and Other Records

(1) Every registered person shall keep and maintain, at his principal place of business, as mentioned in the certificate of registration, a true and correct account of-

·       production or manufacture of goods.

·       inward and outward supply of goods or services or both.

·       stock of goods.

·       input tax credit availed.

·       output tax payable and paid; and

·       such other particulars as may be prescribed:

Provided that where more than one place of business is specified in the certificate of registration, the accounts relating to each place of business shall be kept at such places of business:

Provided further that the registered person may keep and maintain such accounts and other particulars in electronic form in such manner as may be prescribed.

(2) Every owner or operator of warehouse or godown or any other place used for storage of goods and every transporter, irrespective of whether he is a registered person or not, shall maintain records of the consigner, consignee and other relevant details of the goods in such manner as may be prescribed.

(3) The Commissioner may notify a class of taxable persons to maintain additional accounts or documents for such purpose as may be specified therein.

(4) Where the Commissioner considers that any class of taxable person is not in a position to keep and maintain accounts in accordance with the provisions of this section, he may, for reasons to be recorded in writing, permit such class of taxable persons to maintain accounts in such manner as may be prescribed.

(5) Every registered person whose turnover during a financial year exceeds the prescribed limit shall get his accounts audited by a chartered accountant or a cost accountant and shall submit a copy of the audited annual accounts, the reconciliation statement under sub-section (2) of section 44 and such other documents in such form and manner as may be prescribed.

(6) Subject to the provisions of clause (h) of sub-section (5) of section 17, where the registered person fails to account for the goods or services or both in accordance with the provisions of sub-section (1), the proper officer shall determine the amount of tax payable on the goods or services or both that are not accounted for, as if such goods or services or both had been supplied by such person and the provisions of section 73 or section 74, as the case may be, shall, mutatis mutandis, apply for determination of such tax.

Section 36 – Retention of accounts – 72 months from furnishing annual return.

Rule 56

Maintenance of accounts by registered persons.

(1) Every registered person shall keep and maintain, in addition to the particulars mentioned in sub-section (1) of section 35, a true and correct account of the goods or services imported or exported or of supplies attracting payment of tax on reverse charge along with the relevant documents, including invoices, bills of supply, delivery challans, credit notes, debit notes, receipt vouchers, payment vouchers and refund vouchers.

(2) Every registered person, other than a person paying tax under section 10, shall maintain the accounts of stock in respect of goods received and supplied by him, and such accounts shall contain particulars of the opening balance, receipt, supply, goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample and the balance of stock including raw materials, finished goods, scrap and wastage thereof.

(3) Every registered person shall keep and maintain a separate account of advances received, paid and adjustments made thereto.

(4) Every registered person, other than a person paying tax under section 10, shall keep and maintain an account, containing the details of tax payable (including tax payable in accordance with the provisions of sub-section (3) and sub-section (4) of section 9), tax collected and paid, input tax, input tax credit claimed, together with a register of tax invoice, credit notes, debit notes, delivery challan issued or received during any tax period.

(5) Every registered person shall keep the particulars of –

(a) names and complete addresses of suppliers from whom he has received the goods or services chargeable to tax under the Act;

(b) names and complete addresses of the persons to whom he has supplied goods or services, where required under the provisions of this Chapter;

(c) the complete address of the premises where goods are stored by him, including goods stored during transit along with the particulars of the stock stored therein.

(6) If any taxable goods are found to be stored at any place(s) other than those declared under sub-rule (5) without the cover of any valid documents, the proper officer shall determine the amount of tax payable on such goods as if such goods have been supplied by the registered person.

 

 

TDS under GST

 TDS under GST

TDS under GST is applicable since 1st October 2018

Sec 51 of CGST Act deals with TDS on GST

Applicability

If the contract value is more than Rs 2.50 Lakhs, the following class of persons who are registered under GST Law are required to deduct TDS on GST

1. A Department of Establishment of the Central Government or State Government.

2. Local Authority

3. Government Agencies

4. Such persons or Category of persons notified by Government.

The following category of persons have been notified by the Govt on which the provisions of TDS on GST would be applicable.

An authority or board or any other body with 51% or more participation by way of equity or control

1. Set up by an Act of Parliament or a State Legislature; or

2. Established by any Govt., Society established by the Central Govt. or State Govt. or a Local Authority under the Society Regulation Act 1860

Public Sector Undertakings

The above persons “As per provisions of section 24(vi) (Who are required to deduct TDS under Section 51, Shall take registration in the Form GST REG-07

 

Registration

A person who is liable to deduct TDS has to compulsorily register under Section 24(vi) and there is no basic exemption limit. Registration under GST can be obtained without PAN and by using the existing tax deduction and collection account number (TAN) issued by Income Tax Act.

A person liable to deduct tax is required to register as a diductor even if he is registered separately as supplier.

 

Applicability and Rate

 on payment made to supplier of taxable Goods or Services, where the total value of such supply or services under individual contract in excess of Rs 2.50 lakhs.

 

Deposit of TDS on GST

The amount of TDS deducted should be deposited with Government by the deductor by the 10th of next month. In FORM GSTR 7, through the online portal gst.gov.in.

Late filing of GSTR-7 results in a late fee of Rs 100 per day under CGST and Rs 100/- under SGST, hence, a total of Rs 200/- per day is levied. Maximum penalty cap is Rs 5000/= under CGST and Rs 5000/- under SGST.

Apart from Late fee- Interest @ 18% PA, applicable from next day of the due date of filing of return to the day of making actual payment.

Any excess or erroneous amount deductible and paid to the Government shall be dealt for refund under section 54. However, if the deduction amount is already credited to the Electronic Cash Ledger of the Supplier, the same shall not be refunded.

 

TDS Certificate

TDS certificate would also to be issued by the deductor in GSTR 7A to the deductee, within 5 days of depositing the TDS with the Government. Non- Compliance of the above will attract late of Rs 100/- per day subject to maximum of Rs 5000/-

 

Tax deduction is not required in following situations:

a) Total value of taxable supply? Rs. 2.5 Lakh under a contract.

b) Contract value > Rs. 2.5 Lakh for both taxable supply and exempted supply, but the value of taxable supply under the said contract? Rs. 2.5 Lakh.

c) Receipt of services which are exempted. For example, services exempted under notification No. 12/2017 – Central Tax (Rate) dated 28.06.2017 as amended from time to time.

d) Receipt of goods which are exempted. For example, goods exempted under notification No. 2/2017 – Central Tax (Rate) dated 28.06.2017 as amended from time to time.

e) Goods on which GST is not leviable. For example, petrol, diesel, petroleum crude, natural gas, aviation turbine fuel (ATF) and alcohol for human consumption.

f) Where a supplier had issued an invoice for any sale of goods in respect of which tax was required to be deducted at source under the VAT Law before 01.07.2017, but where payment for such sale is made on or after 01.07.2017 [Section 142(13) refers].

g) Where the location of the supplier and place of supply is in a State(s)/UT(s) which is different from the State / UT where the deductor is registered.

h) All activities or transactions specified in Schedule III of the CGST/SGST Acts 2017, irrespective of the value

i) Where the payment relates to a tax invoice that has been issued before 01.10.2018.

j) Where any amount was paid in advance prior to 01.10.2018 and the tax invoice has been issued on or after 01.10.18, to the extent of advance payment made before 01.10.201

k) Where the tax is to be paid on reverse charge by the recipient i.e. the deductee.

l) Where the payment is made to an unregistered supplier.

m) Where the payment relates to “Cess” component.

Taxability of Liquidated Damages under GST

 Taxability of Liquidated Damages under GST

Liquidated damages refer to the pre-determined amount of compensation that a party agrees to pay in the event of a breach of contract or default by one of the parties. Under GST (Goods and Services Tax), liquidated damages may be subject to tax depending on the circumstances of the case.

If liquidated damages are part of the contract price and are paid for the supply of goods or services, they are treated as consideration for the supply and are subject to GST at the same rate as the supply. This means that if the supply is subject to GST, the liquidated damages will also be subject to GST at the same rate.

However, if the liquidated damages are paid for reasons other than the supply of goods or services, such as compensation for breach of contract or default, they may not be subject to GST. In such cases, the payment of liquidated damages will be treated as a penalty or fine, and penalties and fines are not subject to GST.

It is important to note that the tax treatment of liquidated damages under GST will depend on the specific facts and circumstances of each case.

 

As and when there is any breach of contract, the suffering party would be paid the amount in the form of liquidated damage or compensation, penalty, or cancellation charges, etc.

Notably, there prevailed a lot of confusion in the trade and industry concerning the applicability of GST on such liquidated damage or compensation or penalty or cancellation charges vis-à-vis entry at para 5(e) of Schedule II of the Central Goods and Services Tax Act, 2017.

In a view to providing clarification on the above issue, the Ministry of Finance issued a circular no. 178/10/2022-GST dated 3^rd August 2022.

Understanding the scope of entry at para 5(e) of Schedule II –

As per para 5(e) of Schedule II, the following supply is specifically declared as a supply of service –

1.    Agreeing to the obligation to refrain from an act – Some of the relevant examples are –

• Non-compete agreement,
• An industry refraining from carrying out the manufacturing activity per certain specified hours.

2.    Agreeing to the obligation to tolerate an act/a situation – One of the relevant examples is –

• A hawker can operate in front of the shop on payment of a monthly amount to the shopkeeper.

3.    You are agreeing to the obligation to do an act.

Going through the above examples, it would be somewhat clear that the intention was to cover such services within the ambit of para 5(e) of Schedule II. However, taking the recourse of para 5(e) of Schedule II, demands were being raised on –

• Amount of charges i.e., fine/ penalty levied on dishonor of the Cheque,
• Liquidated damages paid on account of breach of contract,
• Late payment charges collected by the service provider on account of late payment of bills,
• The penalty levied for violation of any law,
• Notice pay recovery, etc.

Clarification provided on the taxability of liquidated damages and liked charges under GST –

General clarification was given vide circular no. 178/10/2022-GST dated 3^rd August 2022, is that –

• An agreement to do/ refrain from an act/ situation should not be imagined/ presumed to exist.
• In order to bring the payment within the ambit of GST, there should be an express/ implied promise done on the part of the recipient of the money to either agree to do or abstain from doing something against the money so paid to him.
• It is specifically clarified that the following payments are not a consideration for tolerating an act/ situation –
• Liquidation damages for breach of contract.
• Penalty for the dishonor of Cheque.
• Forfeiture of salary/ payment of the amount on the basis of the employment bond for leaving employment before the minimum agreed period.
• The penalty levied under the mining act on account of excess stock found with the mining company; etc.
• Importantly, such payment will not be considered as ‘consideration’ and accordingly will not be considered as ‘supply’ unless –
• Payment is made for an independent activity of tolerating an act; and
• Payment is made under an independent agreement entered for such activity of tolerating act.