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Clarifications on important aspects under Goods and Services Tax (‘GST’)
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The Central Board of Indirect Taxes and Customs (‘CBIC’) has issued circulars clarifying certain important aspects under the GST. The key aspects under the circulars are summarised below:
Circular No. 178/10/2022 (‘the Circular 178’) – GST applicability on liquidated damages, compensation and penalty, etc.
CBIC has laid down principles to determine the taxability of certain activities in reference to the Entry 5(e) of Schedule II of the CGST Act (i.e., agreeing to (a) the obligation to refrain from an act, (b) to tolerate an act or a situation, (c) to do an act are supply of services).
The Circular 178 has specified that the following key principles would be applicable for determining the taxability of an activity under the aforesaid entry:
- There must be a contractual agreement whether verbal or written where one of the parties (‘first party’) to such agreement/contract must be under a contractual obligation to either (a) refrain from an act, or (b) to tolerate an act or a situation or (c) to do an act
- Some “consideration” must flow in return from the other party to the first party for the activities.
- An agreement to do an act or abstain from doing an act or to tolerate an act or a situation cannot be imagined or presumed to exist just because there is a flow of money from one party to another
- Unless there is an express or implied promise by the recipient of money to agree to do or abstain from doing something in return for the money paid to him, it cannot be assumed that such payment was for doing an act or for refraining from an act or for tolerating an act or situation·
- The key issue is to consider whether the payments constitute consideration for another independent contract envisaging tolerating an act or situation or refraining from doing any act or situation or simply doing an act. If the answer is yes, then it constitutes a “supply” within the meaning of the Act, otherwise it is not a “supply”
Based on the aforesaid principles, the Circular 178 has clarified the taxability of certain key transactions which has been summarised herein below:
| Activity |
Clarification |
Taxable
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| Liquidated Damages |
- Cannot be construed as a consideration received for tolerating the breach or non-performance of contract, rather these are payments for not tolerating the breach of contract·
- These are merely a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach
- Such payments do not constitute consideration for a supply
- Examples of such cases are damages resulting from damage to property, negligence, piracy, unauthorized use of trade name, copyright, etc.
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No
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| Forfeiture of salary, etc., where employee leaving before the agreed period |
- These are incorporated in the employment contract to discourage non-serious candidates from taking up employment
- Amounts are recovered not as a consideration for tolerating the act of such premature quitting of employment but as penalties for dissuading the non-serious employees from taking up employment
- Employee does not get anything in return from the employer against payment of such amounts
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| Late payment surcharge or fee |
- It is a facility granted by supplier naturally bundled with the main supply
- Even if this service is described as a service of tolerating the act of late payment, it is an ancillary supply naturally bundled and supplied in conjunction with the principal supply, and therefore should be assessed as the principle supply
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Yes (same as principal supply)
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Cancellation Charges |
- Facilitation service of allowing cancellation against cancellation charges is naturally bundled and in conjunction with the principal supply (per commercial terms of the contract)
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Circular No. 177/09/2022: Applicability of concessional rates of GST and exemptions on certain supplies
CBIC has clarified the taxability of certain supplies in reference to exemptions and concessional rates. Key clarifications are summarized herein below:
(a) For past cases, i.e., before 6 Oct 2021, cases of payment of GST on supply of ice-cream by ice-cream parlours @ 5% without Input Tax Credit (‘ITC’) benefit shall be treated as fully GST paid to avoid unnecessary litigation. No refund of GST paid would be allowed. Further, ice cream parlours are required to pay GST on supply of ice-cream @ 18% with ITC with effect from 06 Oct 2021.
(b) Sale of developed land is also sale of land and accordingly does not attract GST. However, services provided for development of land, like levelling, laying drainage lines would attract GST at the applicable rate
(c) Renting of trucks and other freight vehicles with driver for a period of time is a service of ‘renting of transport vehicles with operator’ falling under Chapter Heading ‘9966’ and not ‘service of transportation of goods by road’. Therefore, such activity is not eligible for GST exemption provided for the services of transportation of goods. For rental services of goods carriages where the cost of fuel is in included in the consideration charged from the recipient of service, GST rate has been reduced from 18% to 12% with effect from 18.07.2022.
(d) In the cases where a body corporate hires the motor vehicle for transport of employees for a period of time, during which the motor vehicle would be at the disposal of the body corporate, the service would fall under Chapter Heading ‘9966’, and the body corporate would be liable to pay GST under the reverse charge mechanism (‘RCM’). However, where the body corporate avails the passenger transport service for specific journeys or voyages and does not take vehicle on rent for any particular period of time, the service would fall under Chapter Heading ‘9964’ and the body corporate would not be liable to pay GST under RCM.
(e) Exemption from GST on hiring vehicle by firms for transportation of their employee to and from work would apply to passenger transportation services by non-air conditioned contract carriages falling under Chapter Heading ‘9964’ where according to explanatory notes, transportation takes place over pre-determined route on a pre-determined schedule. In other cases, such exemption would not be applicable.
Circular No. 179/11/2022
CBIC has clarified GST rates and classification of goods based on recommendations of the 47th GST Council meeting. Key clarifications are summarised herein below:
- Electric vehicle whether fitted or not with a battery pack is to be classified under HSN ‘8703’ and shall attract GST @ 5%
- Stones which are not mirror polished, are eligible for concessional rate @ 5%
- Treated sewage water attracts Nil rate of GST
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