Impact of GST on Liquidated Damages
Typically, liquidated damages are levied in the event of a contract breach, performance failure, and non-delivery of supplies, among others. This article will take you through the concept of liquidated damages itself and the applicable rates of GST in such a scenario. Additionally, it will also talk about the people who can raise the GST invoice for liquidated damages. Read on to know more.
Liquidated damages are amounts that are usually stipulated in a contract with the purpose of providing an estimation concerning the actual damages incurred by a party for a specific form of breach of contract that has been supposedly performed by the other relevant party that is a part of the transaction. To put it simply, liquidated damages is basically the compensation that the aggrieved party is entitled to in the event of a contract breach.
These things are typically ascertained where the loss is of an intangible nature. The same is then later stated as a clause in the contract as the amount of money that will need to be paid by the liable party. For instance, if Party A does not deliver the raw materials to Party B as per the terms of the contract, this could cause a loss of the potential revenue for the manufacturer. If such a scenario dawns upon the relevant parties, Party A is obligated to pay 0.5% of the lost revenue for each and every week that it delays the supply, until the delivery has been made.
The following forms of taxes are attracted by liquidated damages under GST laws:
Chapter Heading |
Description |
Applicable Liquidated Damages GST Rate |
9997 |
Other Services |
18% |
9991-9997 |
Services provided by the likes of the Central government, state government(s), Union Territories, or local authority by way of tolerating a contract’s non-performance, for which fines in the form of liquidated damages needs to be paid to the Central government, relevant state governments, authorities representing the Union Territories or local authorities under such a contract |
Nil |
The GST that is paid on liquidated damages can be utilised as an input tax credit (ITC) to set off any future tax liability. However, one must keep in mind that it is subject to the restrictions and conditions imposed under the GST Act.
If you would like to educate yourself further regarding the various facets of the GST Act and how it has impacted the Indian economy, continue reading on Bajaj Markets.
GST Articles