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Indirect Tax Alert - Clarifications issued by the Central Board of Indirect Tax & Customs (CBIC):

05 August 2022

I. Clarification on applicability of GST on Liquidated Damages, Compensation and penalty arising out of breach of contract or other provisions of law (Circular no. 178/10/2022-GST dated 03.08.2022)

1. Entry 5(e) to Schedule II of the Central Goods and Services Tax Act, 2017 (“CGST Act”) provides that “Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act” is considered as supply of service. The Circular stipulates the following as ingredients of supply under the aforesaid entry:

  • Entry 5(e) to Schedule II of the CGST Act comprises three different set of activities viz., (i) the obligation to refrain from an act; (ii) obligation to tolerate an act or a situation; and (iii) obligation to do an act.
  • Either of three activities must be performed under an “agreement” or a “contract” (express or implied) to specifically carry out either of the three activities to fall within the ambit of the said entry. The such contractual arrangement must be independent in its own right, either as a standalone contract or as a part of another contract.
  • The said activity must be undertaken for a consideration which flows from one party to another. Moreover, there must exist a necessary and sufficient nexus between the supply (i.e., agreement to do or to abstain from doing something) and the consideration.

2. Mere flow of money from one party to another in itself does not presuppose existence of above activities in the absence of 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.

3. Payments such as Liquidated Damages for breach of contract, penalties under the mining act for excess stock found with the mining company, forfeiture of salary or payment of amount as per the employment bond for leaving the employment before the minimum agreed period, penalty for cheque dishonour etc. are not a consideration for toleration of an act or situation. They are rather amounts recovered for not tolerating an act or situation and to deter such acts; such amounts are for preventing breach of contract or non-performance and are thus mere ‘events’ in a contract.

4. Further, such amounts paid do not constitute payment (or consideration) for tolerating an act, because there cannot be any contract (a) for breach thereof, or (b) for holding more stock than permitted under the mining contract, or (c) for leaving the employment before the agreed minimum period or (d) for doing something leading to the dishonour of a cheque.

Basis the above principles, the tax implications of specific transactions are also clarified in the circular, as under:

5. Liquidated Damages for breach of contract

  • Breach and non-performance of contract results in loss to other party and by section 73 of the Contract Act, the party who suffered by such breach is entitled to receive compensation for such breach. Such compensation in a written contract for breach of contract is referred to as Liquidated Damages.
  • It has been clarified that Liquidated Damages do not constitute a supply and are, therefore, not taxable, if:
    • The amount paid as “Liquidated Damages” is an amount paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract; and
    • There is no agreement, express or implied, by the aggrieved party receiving the Liquidated Damages, to refrain from or tolerate an act or to do anything for the party paying the Liquidated Damages

In such cases, Liquidated Damages constitute a mere flow of money but not a supply of service.

  • To to determine the taxability of Liquidated Damages, one must examine whether the Liquidated Damages constitute “consideration” for another independent contract envisaging the aforesaid activities. For this, it has been clarified that if the payment is merely an event during the performance of the agreement and it does not represent the “object” as such, of the contract then it cannot be regarded as “consideration”.
  • Taxability of fines or penalties in certain cases:
    • The amounts paid for acceptance of late payment, early termination of the lease or for pre-payment of loan or the amounts forfeited on cancellation of service by the customer as contemplated by the contract as part of commercial terms agreed to by the parties, constitute consideration for the supply of a facility, namely, of acceptance of late payment, early termination of a lease agreement, of pre-payment of loan and of making arrangements for the intended supply by the tour operator, respectively.
    • Such payments, even though they may be referred to as fine or penalty, are actually payments that amount to consideration for a supply, and are subject to GST, in cases where such supply is taxable.
    • Since these supplies are ancillary to the principal supply for which the contract is signed, they shall be eligible to be assessed as the principal supply.

6. Compensation is given to previous allottees of coal blocks for cancellation of their licenses

It has been clarified that compensation paid for cancellation of coal block licenses pursuant to the order of the Hon’ble Supreme Court as well as the provisions of the Coal Mines (Special Provisions) Act, 2015 was not taxable, in the absence of any agreement between previous allotees of the coal block and the Government to tolerate cancellation of coal block allotted to them on payment of compensation.

7. Cheque dishonor fine / penalty charged

It has been clarified that the fine or penalty that the supplier or a banker imposes, for the dishonour of a cheque, is not a penalty imposed for tolerating the act or situation but a fine, or penalty imposed for not tolerating, penalizing and thereby deterring and discouraging such an act or situation. Therefore, a cheque dishonor fine or penalty is not a consideration for any service and is not taxable.

8. Penalty imposed for violation laws

Penalties imposed for violation of laws are not considered for supply received and are not taxable. Further, fines, and penalties are imposed by the Mining Department on discovering mining of excess minerals beyond the permissible limit or mining activities in violation of the mining permit is also a similar case. Such penalties are imposed for violations of laws and cannot be treated as consideration for toleration of an act. Similar clarification was issued in the service tax regime vide circular no:192/02/2016-Service tax dated 13.04.2016.

9. Forfeiture of salary or payment of the Bond amount by an employee leaving the employment before the minimum agreed period

  • Forfeiture of salary or recovery of the bond amount in the event of the employee leaving the employment before the minimum agreed period forms part of the employment contract to discourage non-serious candidates from taking up employment and to prevent any disruption in work due to premature exit of an employee.
  • The said amounts are recovered by the employer not as consideration for tolerating the act of such premature quitting of employment but as penalties for dissuading the non-serious employees from taking up employment and to discourage and deter such a situation.
  • Further, the employee does not get anything in return from the employer against payment of such amounts. Therefore, such amounts recovered by the employer are not taxable as consideration for the service of agreeing to tolerate an act or a situation.

10. Late payment charges collected by any service provider for late payment of bills

The facility of accepting late payments with interest or late payment fee, fine or penalty is a facility granted by supplier naturally bundled with the main supply such as of electricity, water, telecommunication, cooking gas, insurance etc. Accordingly, it should be assessed at the same rate as the principal supply.

11. Fixed charges collected by a power generating company from State Electricity Boards (SEBs) or by SEBs/DISCOMs from the individual customer for the supply of electricity

The price charged for electricity by the power generating companies from the SEBs/DISCOMS or by SEBs/DISCOMs from individual customers has two components, namely, a minimum fixed charge (or capacity charge) and a variable per unit charge. Both these components are charged for the sale of electricity and are thus not taxable since the supply of electricity is exempt from GST.

12. Cancellation charges recovered by suppliers

  • The supplier may allow cancellation of supply by the customer within a certain specified time period on payment of cancellation fee as per commercial terms of the contract. In case the customer does not show up for availing of the service, the supplier may retain or forfeit part of the consideration or security deposit or earnest money paid by the customer for the intended supply.
  • Cancellation fee can be considered as the charges for the costs involved in making arrangements for the intended supply and the costs involved in the cancellation of the supply.
  • Services such as transportation, travel and tour constitute a bundle of services. The facilitation service of allowing cancellation against payment of cancellation charges is also a natural part of this bundle. It is invariably supplied by all suppliers of passenger transportation services as naturally bundled and in conjunction with the principal supply of transportation in the ordinary course of business.
  • It has been clarified that supply of allowing cancellation of an intended supply against payment of cancellation fee or retention or forfeiture of a part or whole of the consideration or security deposit in such cases should be assessed as the principal supply.
  • However, forfeiture of earnest money by a seller in case of breach of ‘an agreement to sell an immovable property by the buyer or such forfeiture by Government or local authority in the event of a successful bidder failing to act after winning the bid for allotment of natural resources, is a mere flow of money, as the buyer or the successful bidder does not get anything in return for such forfeiture of earnest money. Forfeiture of earnest money is stipulated in such cases not as consideration for tolerating the breach of contract but as compensation for the losses suffered and as a penalty for discouraging the nonserious buyers or bidders. Such payments being merely a flow of money are not a consideration for any supply and are not taxable.

13. In addition to the above, it has been clarified that the compensation paid by NHAI to the toll operators for not collecting toll charges during the period 8 November 2016 to 1 December 2016, would be treated as exempt, where consideration for such service was paid by a person other than the actual user of service, and therefore, not leviable to Service tax.

BDO Comments

The aforesaid clarifications are a welcome move to settle long-drawn disputes under the GST regime as well as the pre-GST regime concerning the interpretation of the clause “Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act”. There have been multiple judicial precedents in legacy laws, where the position as clarified in the above circular has been upheld that there has to be a contractual obligation to act or not to act, for taxability under the above entry.

However, the observation concerning the levy of GST on penalty and fines for amounts paid for acceptance of late payment, pre-payment of loan, cancellation of services, etc. could lead to some ambiguity and various interpretational issues. It would be important to refer to contractual terms before taking any position on this issue.


II. Clarification regarding applicable GST rates and exemptions on certain services (Circular no. 177/9/2022-TRU dated 03.08.2022)

Representations received on various issues were examined by the GST Council in the 47th meeting held on 28th and 29th June 2022 and clarifications, as recommended by the GST Council, have been issued which are summarized in the ensuing paragraphs:

1. GST rate on supply of ice cream by ice cream parlours during the period 01 July 2017 to 5 October 2021

  • Vide circular no:164/20/2021-GST dated 6 October 2021, it was clarified that ice cream parlours sell already manufactured ice cream and where ice cream is sold by parlor or any similar outlet, attracts a standard GST rate of 18% with a full input tax credit.
  • Now it is clarified that where the ice cream parlors have paid GST@ 5% till 6.10.2021 without claiming ITC, it would be treated as due discharge of GST liability. Further, no refund would be granted, if the tax was paid @ 18% with ITC.

2. GST rate on the selling of space for advertisement in souvenirs

  • Sale of space for advertisement in souvenir books is subject to GST @ 5%, at par with the sale of space for advertisement in print media.

3. GST on the transport of minerals from mining pit head to a railway siding, beneficiation plant, etc. by vehicles deployed with driver for a specific duration

  • In the cases, where the vehicles are given on hire to the mining lease operator, who bears the expenses for fuel, and the vehicles with driver are at the disposal of the mining lease operator for transport of minerals within the mine area, such services are classifiable as a service of renting of transport vehicles with operator falling under Heading 9966 and not service of transportation of goods by road. Accordingly, such service is not eligible for exemption by treating it as transport of goods by a person other than GTA and will attract GST @ 18% where the cost of fuel is included in the consideration charged from the recipient of service (12% from 18.07.2022).

4. GST on payment of honorarium to the Guest Anchors

  • Services provided by the guest anchors in lieu of honorarium attract GST liability. However, guest anchors can claim the benefit of threshold exemption.

5. Levy of GST on sale of land after levelling, laying down of drainage lines etc.

  • Sale of developed land is also the sale of land and is covered by Sr. No. 5 of Schedule III of CGST Act and does not attract GST. However, any service provided for the development of land, like levelling, and laying of drainage lines to the developers shall attract GST at the applicable rate for such services.

6. Levy of GST on renting of motor vehicles under the reverse charge mechanism

  • Where the body corporate hires the motor vehicle (for transport of employees etc.) for a period of time, during which the motor vehicle shall be at the disposal of the body corporate and it can use the vehicle in the manner as it likes (subject to agreement with the supplier), the services would be classified as services of renting of motor vehicles and the recipient, i.e. body corporate will be liable to pay GST under reverse charge mechanism.
  • However, where the body corporate avails the passenger transport service for specific journeys or voyages and does not take the vehicle on rent for any particular period, the service would be classified as services of transportation of passengers and the body corporate shall not be liable to pay GST under reverse charge.

7. Rate of GST on supply of service of construction, supply, installation and commissioning of dairy plant on a turnkey basis

  • A contract of the nature of construction, installation and commissioning of a dairy plant constitutes a supply of works contract, as the dairy plant which comes into existence as a result of such contract is an immovable property.
  • Such works contract services were eligible for a concessional GST rate of 12% up to 18.07.2022; from 18.07.2022, such Works Contract services would attract GST of @18%.

8. Clarifications concerning eligibility to claim an exemption under Exemption Notification

Sl. No.

Service description



Application fees charged for an entrance examination or issuance of eligibility certificate (for admission) or issuance of migration certificate by educational institutes

  • Amount or fee charged from the prospective students for entrance examination or admission, or for issuance of eligibility certificate in the process of their entrance/admission as well as fees charged for issuance of migration certificates by the educational institutions to the leaving or ex-students is exempt under entry 66 of notification no:12/2017-CT(R) dated 28-06-2017.


Storage or warehousing of cotton in baled or ginned form (Before 18 July 2022)

  • Service by way of storage or warehousing of cotton in ginned and/ or baled form is covered under entry no:24B of notification no:12/2017-CT(R) dated 28-06-2017 and hence exempt from GST until 18.07.2022 (when it was amended).


Applicability of GST on transportation of empty containers returning from Nepal and Bhutan after delivery of transit cargo, to India

  • All the services associated with the movement of transit cargo to and from Nepal and Bhutan are exempt. Movement of empty containers from Nepal and Bhutan, after delivery of goods, therefore, is a service associated with transit cargo to Nepal and Bhutan, and hence, the said service is also exempt from GST.


Sanitation and conservancy services supplied to Army and other Central and State Departments

  • It has been clarified that sanitation and conservancy services supplied to the Indian Army or any other Government Ministry/Department which does not perform any functions listed in the 11th and 12th Schedule, in the manner as a local authority does for the general public, is not eligible for exemption.


Location charges or preferential location charges (‘PLC’) are collected in addition to the lease premium for a long term lease of land

  • Location charges or PLC paid upfront in addition to the lease premium for a long term lease of land constitute part of the upfront amount charged for a long term lease of land and are eligible for the same tax treatment as upfront payment for long-term lease of land, and thus, eligible for the exemption given to such upfront amount paid for long term lease of land.


Additional toll fees are collected in the form of higher toll charges from vehicles not having Fastag

  • The additional amount collected from the users of the road not having a functional Fastag, is in the nature of toll charges and should be treated as additional toll charges and hence, exempt from payment of GST.


Services in form of Assisted Reproductive Technology (ART) / In vitro fertilization (IVF)

  • The abnormality/disease/ailment of infertility is treated using ART procedures such as IVF. It is clarified that services by way of IVF are also covered under the definition of healthcare services and hence, eligible for exemption from GST as available to healthcare services.


The hiring of vehicles by firms for transportation of employees to and from work in non airconditioned contract carriage

  • The transportation of passengers, taking place over a pre-determined route on a pre-determined schedule is eligible for exemption.
  • If the contract carriage is hired for a period of time, during which the contract carriage is at the disposal of the service recipient, and the recipient is free to decide the manner of usage (route and schedule) subject to the contractual arrangement, the exemption does not apply as it falls under the exclusion clause of the exemption entry.


Tickets of private ferry used for passenger transportation

  • This exemption applies to tickets purchased for transportation from one point to another irrespective of whether the ferry is owned or operated by a private sector enterprise or by a PSU/government. The expression ‘public transport’ used in the exemption notification only means that the transport should be open to the public and it can be privately or publicly owned. The only exclusion is on transportation which is predominantly for tourism, such as services which may combine with transportation, sightseeing, food and beverages, music, accommodation such as in shikara, cruise etc.


BDO Comments 

The aforesaid clarifications are set to settle various disputes on the applicability of exemption/tax rates on various services.

III. Clarification regarding GST rates and classification of goods (Circular no. 179/11/2022-GST dated 03.08.2022)

Based on the recommendations of the GST Council in its 47th meeting, the following clarifications have been issued in respect of the applicable GST rate and classification of goods:

Sl. No.

Product Description



Electric vehicles whether or not fitted with a battery pack

  • Electrically operated vehicle to be classified under HSN 8703 even if the battery is not fitted to the such vehicle at the time of supply and it will attract GST @ 5% in terms of entry 242A of Schedule I of notification no:1/2017-Central Tax (Rate) (“Notification No. 1/2017”)


Stones otherwise covered in S. No. 123 of Schedule-I (such as Napa stones), which are not mirror polished

  • Napa Stone is a variety of dimensional limestone, which is a brittle stone and cannot be subject to extensive mirror polishing. Therefore, such minor polished stones do not qualify as mirror polished stones.
  • Accordingly, it has been clarified that sl. no:123 of Schedule-I to the Notification No. 1/2017 covers minor polished stones, which would be subject to GST @ 5%.


Classification of Mangoes under CTH 0804

  • Fresh mangoes falling under heading 0804 are exempt. Mangoes, sliced and dried, falling under 0804 are chargeable to a concessional rate of 5%. All other forms of dried mango, including Mango pulp, attract GST at the rate of 12%.


Treated sewage water

  • Treated sewage water was not meant to be construed as falling under “purified” water for the purpose of levy of GST.
  • Accordingly, it is clarified that supply of treated sewage water, falling under heading 2201, is exempt under GST.


Nicotine Polacrilex Gum

  • Nicotine Polacrilex gum, which is commonly applied orally and is intended to assist tobacco use cessation, is appropriately classifiable under tariff item 2404 91 00 with applicable GST rate of 18%.


Fly ash bricks and aggregate (Clarification on condition of 90% fly ash content)

  • As per the 23rd GST Council meeting, the condition of 90% or more fly ash content was applicable only for fly ash aggregate
  • It has been clarified that the condition of 90 per cent or more fly ash content applies only to Fly Ash Aggregates and not to fly ash bricks and fly ash blocks.
  • From 18.07.2022, the said condition has been omitted.


By-products of milling Dal/ Pulses such as Chilka, Khanda and Churi

  • Such goods which inter alia is used as cattle feed ingredient are appropriately classifiable under heading 2302 and attract GST @5%.
  • For the past period, the matter would be regularized on an is basis.


BDO Comments:

The aforesaid clarifications are set to settle various disputes on the applicability of exemption / GST rate on various goods.