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Applicability of GST on liquidated damages collected from Supplier of Goods located outside India

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Kashinath Gorai

21 Points Posted on 11 April 2020

As per the terms of Purchase order placed on Foreign Supplier for import of goods, liquidated Damages (LD) shall be applicable, if delivery of Goods is not done as per delivery schedule given in Purchase Order. Since, LD is in the nature of tolerating an act (of late supply of Goods), it is to be treated as a Supply of Service.Whether, GST needs to be deposited to Govt on collection of such Liquidated damages. If yes, whether applicable GST amount can be collected/recovered from the Foreign Supplier.

Replies (2)

Quick Summary

This discussion explores whether Goods and Services Tax (GST) applies to liquidated damages (LD) collected from suppliers located outside India for delayed goods delivery. The consensus is that LD, being compensation for tolerating an act (late supply), is considered a supply of service and therefore subject to GST. The Maharashtra AAR ruling supports this view, stating an 18% GST rate is payable on such damages. The applicability of GST hinges on the agreement's terms and whether the GST amount can be recovered from the foreign supplier.

Jeevesh

Partner

32 Points Posted on 12 April 2020

It will comes under the definition of consideration as defined in section 2(31) of the CGST Act (more particularly it comes under - the monetary value of any forbearance in response to the supply of goods) and hence subject to GST.
Point of taxation depends upon the treatment in books of accounts.
Collection of GST anyway lies with you on forward basis. If not will have to pay out of pocket. Go through the agreement clause. Relationship with the foreign party will save you the cost.

Pankaj Rawat

GST Practitioner

29904 Points Posted on 12 April 2020

The Maharashtra Authority for Advance Ruling (“AAR”) in the case of Maharashtra State Power Generation Company Limited (“Applicant”) held that Goods and Services Tax (“GST”) at the rate of 18% would be payable on liquidated damages (“LD”) received by the Applicant for delayed supply under a contract.