Liquidated damages in certain cases to draw 18% GST: AAR

Liquidated damages received by a service receiver from a service provider for not meeting terms of contract would attract 18 per cent goods and services tax (GST) in certain cases, the authority for advance rulings (AAR) in Andhra Pradesh has ruled.

Liquidated damages are the sum that one party receives when the other party fails to meet provisions of a contract between them.

The ruling was given in an application by Andhra Pradesh Development Company (APPDCL), a special-purpose vehicle set up to implement mega power projects in the state.

The order came despite a circular issued by the government in 2022 that says liquidated damages are a mere flow of money from a party that caused a breach of contract to a party that suffered loss due to such breach. Such payments do not constitute consideration for supply and are not taxable, the circular had said.

However, AAR said the circular was not universal and absolute but only meant to clarify the position of law and shall be applied reasonably having regard to the facts of the case.

APPDCL entered into an agreement with Chettinad Logistics Pvt. Ltd. (CLPL) for supply of services, which included liasoning with MCL, East Coast Railways, Paradip and Adani Krishnapatnam ports for coordination and supervision of coal loading, arranging rakes, transportation of raw coal, and crushing of boulders.