Payments for nonperformance of a contract would be subject to GST of close to 18 percent.

According to a report in The Economic Times, Authority for Advance Rulings (AAR) has passed a judgement on such instances to be taxed.

This is a quasi-judicial body that allows companies to understand potential tax liabilities over any transaction in advance.

These damages are genuine estimates made to circumnavigate the calculations behind the damages, contractual disputes and cases of non-performance.

The report also said that companies that deal with infrastructure and mining projects are wary of the new judgement and the possible effects it may have on mergers and acquisitions and franchise arrangements.

Tax experts provide various arguments on the judgement, from the basic taxable transaction of “supply” and “consumption” not taking place in the case of liquidated damages, to the need for more clarity on what constitutes the non-performance of a contract.

 

Source: Moneycontrol

 

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