After the introduction of the GST laws, a confusion arose in the industry as to whether the damages claimed by the assessee/companies, such as liquidated damages, forfeiture of surety bond, earnest money, security deposit, bank guarantee etc. would attract GST or not. The industry experts were of the view that such transactions would not come under the purview of GST laws. However, the Department with respect to the afore-stated transactions was of the view that amount received by the assessee under the aforesaid heads would be liable to GST as the same has been received for tolerating an act and thus, would be considered as supply under entry at para 5(e) under Schedule II of the CGST Act, 2017. Though there were judgments in favour in the erstwhile regime with respect to most of the issues mentioned above, the position as to the taxability under GST Law was not clear.
Since our team didn't subscribe to the view of the Department across the country, on 13 April 2022, an application for advance ruling was filed by us under Section 97 of the CGST Act, 2017 before the Haryana Authority for Advance Ruling for the assessee who was facing the similar issues and had confusion about the taxability of above-mentioned transactions. Further through the said application, it was submitted that how as per our interpretation of law an amount received as liquidated damages or forfeiture of any amount in terms of a contract cannot be considered as supply under the CGST Act, 2017, as the same is merely in form of compensation received by the assessee/company due to breach of contract on part of the defaulting party. During the pendency of the application filed before the authority for advance ruling, the Department of Revenue issued a clarificatory circular bearing no. 178/10/2022-GST dated 03 August 2022 and clarified the interpretation of entry 5(e) of Schedule II of the CGST Act, 2017 and further stated that such liquidated damages collected or forfeiture of any amount is mere flow of money for not tolerating an act which is only an event during the course of the contract, and thus, does not constitute supply as per the provisions of the CGST Act, 2017. During personal hearing of the matter, our team demonstrated before the Authority as to how amount received in lieu of liquidated damages or forfeiture of surety bond, earnest money, security deposit, bank guarantee etc. would not attract GST and further, brought to their notice, the aforesaid clarificatory circular dated 03rd August 2022, issued by the Department of Revenue supported the interpretation submitted by us and clarified that liquidated damages and forfeiture of any amount does not attract GST and consequently, the Advance Ruling Authorities also agreed with the submissions advanced and held that no GST is applicable on the same.
Through the same application for advance ruling, our team sought clarity about the taxability of some other important issues, which was very much required for the industry and are adopted and followed by most of the assessees throughout the country. The issues/questions raised were: - (1) whether subsidised canteen charges deducted from salary of the employees is liable to GST; (2) whether amount recovered for issuing fresh ID cards on account of loss or replacement of the same is leviable to GST; and (3) whether the amount of Creditors balance unclaimed/untraceable and written off by the company by the way of crediting P&L A/c is leviable to GST?
With respect to the issue of applicability of GST on subsidised canteen charges, it was contended that for providing canteen facility to the employees, the Applicant has engaged a third-party contractor and since the cost of the meal is decided in advance, the Applicant recovers a nominal amount of the same from its employees who are the ultimate beneficiary of the said service. It was further brought to the notice of the Authority that the invoice is raised on the Applicant on which GST is paid by the Applicant and the Applicant is not in the business of providing canteen services and thus, such facility provided by the Applicant to its employees is not in the course of furtherance of business. The said contention of our team was duly accepted by the Advance Ruling Authorities, and it was held that the GST is not applicable on the subsidised canteen charges deducted from salary of the employees.
In today's era, most of the organisations/companies provide ID cards to its employees which they are required to carry while coming to the office. While the said ID cards are provided for free when the employee joins the organisation. However, in a situation where the employee has lost his/her ID card or the ID card has become unusable due to day-to-day wear and tear, in such cases, the organisations/companies typically charge a nominal fee from the employee to reissue the respective ID cards. Now the question arises, whether this nominal fee charged by the organisation for re-issuance of ID Cards to the employees would attract GST? Our team being of the view of that amount charged for re-issuance of ID cards would not attract GST contended before the Authorities that the Applicant is not in the business of providing services of printing of ID cards and said service provided to the employee has no nexus with the principal business of the Applicant. It was further brought to the notice of the Authorities that the Applicant is itself printing the said ID cards and is not availing said service from any third party. Agreeing with the contention of our team, the Ld. Advance Ruling Authority held that the service of printing ID cards for the employees would fall under Entry 1 of Schedule III under CGST Act, 2017 and thus, would not attract GST.
The last issue raised by our team before the Ld. Advance Ruling Authority was whether the amount of Creditors balance unclaimed/untraceable and written off by the company by the way of crediting P&L A/c is leviable to GST?
From the perusal of the issue itself, one can ascertain that there is no supply of goods or services between two or more persons/organisations but the Applicant is merely writing off the unclaimed amount by the creditors by passing a credit entry in the P&L Account and such amount is not payable to the creditor afterwards. The Authority agreed with the submissions and held that no services have been received or provided by the applicant company while writing the balance and therefore, this transaction of writing off unclaimed amount of the contractors/other creditors is basically an income and not a supply, hence outside the purview of scope of supply under the GST Act.
Case details — A.A.R. in Re: Rites Limited
Forum — AAR
Case No. — Advance Ruling No. HR/ARL/19/2022-23 dated 18.10.2022
Represented by — APRA & Associates LLP