GST on penalty for late delivery of goods, Goods and Services Tax - GST

[Kaustubh Karandikar]

XYZ is recovering amount from supplier as penalty towards late delivery of goods. Is XYZ required to pay GST on the amount recovered in view of the clarification issued by CBIC vide its Circular No. 178/10/2022-GST [F. NO. 190354/176/2022-TRU], DATED 3-8-2022. My view is not required to pay as per the clarification given in para 7 of the circular under ‘liquidated damages’. Views of the experts please.

Posts / Replies

[Amit Agrawal]

GST is not payable by XYZ against penalty recovered from the supplier for late delivery of goods.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[KASTURI SETHI]

In this scenario, GST is not payable on the amount of penalty.

[Alkesh Jani]

Dear Experts,

Request to enrich my knowledge,

Why the amount recovered towards penalty for late delivery of goods cannot be considered as "incidental charges"?

Thanks in advance

[Amit Agrawal]

Dear Shri Alkesh Ji,

Is your query in the context of Section 15(2)(c) of the CGST Act?

[Alkesh Jani]

Shri Amitji,

Yes, because liquidated damages and incidental charges are different in my point of view.

Thanks

[KASTURI SETHI]

Dear Sh.Alkesh Jani Ji,

Although by nomenclature it is a penalty, yet in real essence it is compensation and compensation is out of definition of consideration as per Section 2(31) of CGST Act. Pl. read para no. 7 of the circular dated 3.8.22 word for word. Pl. read all its sub-paras.

 

[Kiran Tahelani]

To the best of my knowledge, it seems penalty in question is subject to GST.

Please refer para 7.1.6 of the Circular No. 178/10/2022-GST dated 03.08.2023, wherein it is clarified the facility of accepting late payments with interest or late payment fee is naturally bundled with the main supply it is naturally bundled with the main supply and therefore subject to GST.

The said para is reproduced for reference:

7.1.6 If a payment constitutes a consideration for a supply, then it is taxable irrespective of by what name it is called; it must be remembered that a “consideration” cannot be considered de hors an agreement/contract between two persons wherein one person does something for another and that other pays the first in return. If the payment is merely an event in the course of the performance of the agreement and it does not represent the ‘object’, as such, of the contract then it cannot be considered ‘consideration’. For example, a contract may provide that payment by the recipient of goods or services shall be made before a certain date and failure to make payment by the due date shall attract late fee or penalty. A contract for transport of passengers may stipulate that the ticket amount shall be partly or wholly forfeited if the passenger does not show up. A contract for package tour may stipulate forfeiture of security deposit in the event of cancellation of tour by the customer. Similarly, a contract for lease of movable or immovable property may stipulate that the lessee shall not terminate the lease before a certain period and if he does so he will have to pay certain amount as early termination fee or penalty. Some banks similarly charge pre- payment penalty if the borrower wishes to repay the loan before the maturity of the loan period. Such amounts paid for acceptance of late payment, early termination of 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 prepayment of loan and of making arrangements for the intended supply by the tour operator respectively. Therefore, such payments, even though they may be referred to as fine or penalty, are actually payments that amount to consideration for 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, as discussed in detail in the later paragraphs. Naturally, such payments will not be taxable if the principal supply is exempt

it is also important to refer para 9 of the said circular.

Late payment surcharge or fee

9. 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. It is not uncommon or unnatural for customers to sometimes miss the last date of payment of electricity, water, telecommunication services etc. Almost all service providers across the world provide the facility of accepting late payments with late fine or penalty. 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 principal supply. Since it is ancillary to and naturally bundled with the principal supply such as of electricity, water, telecommunication, cooking gas, insurance etc. it should be assessed at the same rate as the principal supply. However, the same cannot be said of cheque dishonor fine or penalty as discussed in the preceding paragraphs.

Experts may correct me if I am wrong or I have misunderstood the query.

[Amit Agrawal]

Dear Shri Alkesh Ji & Ms. Kiran Tahelani Ji,

Issue raised is liability to pay GST by 'Recipient of Goods' (i.e. XYZ) against penalty recovered because supplier supplied goods beyond agreed timeline.

In other words, 'Value of Goods' supplied u/s 15 is not the issue under discussion. Section 15(2)(c) cannot be read in isolation. First, we need to determine whether there is 'supply' and if yes, then, determine, what is value of such supply u/s 15.

Here, reason for my view (as shared above) is that XYZ has NOT supplied anything to anyone against recovery of penalty for delayed receipt of goods. And hence, entire Section 15 got no application.

Lets see entire case with different eyes:

If one wants to apply Section 15(2)(c) for 'penalty' recovered by the recipient, value of goods supplied will be 'lesser' than agreed price originally (as 'incidental charges' are in 'negative', as far as supplier of goods is concerned). Whether can credit-note u/s 34 be issued by the supplier (assuming that tax-invoice was raised on price agreed originally)? Whether does this situation fall under scenario of 'goods supplied are found to be deficient' or 'tax invoice is found to exceed the taxable value or tax payable in respect of such supply'?

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[KASTURI SETHI]

After reading between the lines , I feel that there is need of the art (nay, 'craft') of drafting and presentation for proving penalty amount in this scenario as 'not taxable'.

[Padmanathan Kollengode]

Settling the facts first:-

Mr.A is supplier; XYZ is recipient

1. Mr.A agrees to sell goods to XYZ for Rs. 5000/- + 900 GST on or before 30th June 2023

2. Mr.A could deliver the goods to XYZ only on 5th July 2023

3. it could be either of following:-

XYZ recovers Rs.1000 from Mr.A as penalty for late delivery of goods and pays balance Rs.4000/- + 900 GST OR

XYZ pays Rs.5000 + 900 GST first and then Mr.A pays Rs.1000 penalty to XYZ

A. Mr.A will have to collect and pay GST on Rs.5000/- i.e 900 being the value of supply. Rs.1000 is not added to the value of supply under "(d) interest or late fee or penalty for delayed payment of any consideration for any supply" for the simple reason that Mr.A is not collecting but he is paying the penalty to XYZ.

B. Further, it is also not covered under "(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;" for the simple reason that penalty here is not charged by the supplier to the recipient. In fact, it is charged by recipient for delay by supplier.

C. This leads to the final question "whether Rs.1000 charged by XYZ amounts to consideration for any service rendered by Mr.A.

C.1. In my opinion NO. The original agreement is only for a single supply. i.e. supply of goods. The agreement is not for tolerating any non-performance. The penalty clause i.e. Liquidated Damages is only in the course of performance of the contract to promote the timely delivery of goods and not consideration for any independent activity. This is clarified by Circular No. 178/10/2022-GST [F. NO. 190354/176/2022-TRU], DATED 3-8-2022.

C.2. Para 7.1.6 only states example by way of quoting "a contract may provide that payment by the recipient of goods or services shall be made before a certain date and failure to make payment by the due date shall attract late fee or penalty.... Therefore, such payments, even though they may be referred to as fine or penalty, are actually payments that amount to consideration for supply, and are subject to GST, in cases where such supply is taxable" this is distinguishable from the facts here, where the recipient is charging penalty from the supplier for late delivery.

[Kaustubh Karandikar]

Thanks all the experts for your valuable views.