MUMBAI: If a payment constitutes a ‘consideration for a supply’, then it is taxable irrespective of the name by which it is called, states the Tax Research Unit (TRU) of the finance ministry. Late on Wednesday, the TRU issued three explanatory GST circulars to high-ranking officials.
The clarifications, especially those relating to ‘Applicability of goods and services tax (GST) on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law’, are a mixed bag for the common man. Under GST laws, ‘agreeing to the obligation to refrain from an act or to tolerate an act or to do an act is a supply of service’ and hence taxable. One of the circulars clarifies GST applicability on cancellation charges in a variety of scenarios.
Chartered accountant Sunil Gabhawalla states, “The circular nicely analyses that the transportation ‘service’ starts with the booking of the travel ticket and lasts at least till exit of the passenger from the destination terminal. If at the time of booking, a consideration is paid and the passenger has the facility to cancel the booking against a charge, in the event of cancellation, this charge that is retained itself becomes a consideration. The cancellation charge is liable to GST at the rates applicable to the principal intended supply. ”
The circular illustrates that the cancellation charges for a first class or AC coach ticket would attract GST at 5%, which is the rate levied on the ticket. The same logic would extend to instances such as cancellation of air travel or hotel accommodation, where the cancellation charges would be taxed at the same GST rate as applicable to the principal service. However, if the seller has obtained earnest money (deposit) from a prospective buyer, say for intended sale of property, and the transaction fails, no GST is payable against the earnest money forfeited. The forfeiture is a compensation for the losses suffered and “not a consideration for tolerating the breach of contract”, explains the circular.
“When the earnest money is forfeited, the supply hasjust not begun and hence the forfeited deposit is not a taxable consideration,” explains Gabhawalla.
Payment in lieu of notice
When an employer recovers any sum by way of forfeiture of salary or recovery of bond amount when an employee leaves prior to the notice period, it is “not a consideration for tolerating the act of premature quitting of employment”, the circular states.
“The Authority for Advance Rulings, Gujarat, in the case of Amneal Pharmaceuticals, held that notice pay recovery is liable to GST. The circular, which states it is not taxable, is likely to put to rest allegations of non-payment of GST on notice pay recovery faced by many MNCs,” states Harpreet Singh, indirect tax partner at KPMG-India.