On 10-08-2022, the Ministry of Railways has issued guidelines for implementation of Goods and Service Tax (‘GST') implications on recovery of liquidated damages which were given by the Central Board of Indirect Taxes and Customs (‘CBIC') vide circular dated 03-08-2022.

Key Points:

  1. Purpose of the CBIC circular: to implement correct GST practice and ensure uniformity in the manner of payments in cases where liquidated damages are levied on the vendors for non- performance of conditions of a contract. Through the circular, CBIC has clarified that payment of such damages is not the desired outcome of the contract, with regard to the taxability of liquidated damage.

  2. Liquidated damages do not constitute consideration received for supply by way of tolerating the breach or non- performance of contract and are not taxable.

  3. Where there is a delay in rendering of supply and the payment is received by the Railways in the form of liquidated damages against tolerating non- performance, it is not liable to GST.

  4. Where a vendor has to be paid and the liquidated damage has been levied, the amount payable will be paid amount of supply including GST less amount of liquidated damage without GST.

Vide CBIC circular dated 03-08-2022: The Ministry of Finance stated that GST will only be applicable in case of cancellation of AC First Class tickets.

Rule: Cancellation of charges of railway tickets for a class would attract GST at the same rate as applicable to the class.

Explanation: 5% GST for the AC First Class tickets and no GST will be imposed on other categories.

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