CBIC issues clarification for GST applicability on several contentious issues: Circular

Circular No. 178/10/2022-GST dated August 3rd, 2022

The CBIC has issued circular to provide clarifications on several contentious issues such as GST applicability on liquidated damages, notice pay recovery, compensation for non-collecting roll charges etc. In respect to taxability of liquidated damages, the CBIC has clarified that where the amount paid as ‘liquidated damages’ is an amount paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract and there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the liquidated damages, in such cases liquidated damages are mere a flow of money due to such breach. Such payments do not constitute consideration for a supply and are not taxable.

Also, the penalty imposed for violation of laws such as traffic violations, or for violation of pollution norms or other laws are also not consideration for any supply received and are not taxable. It is also clarified that amounts recovered by the employer from employee for leaving the employment before the minimum agreed period are not taxable.

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