COVID-19 consequences have already been faced by the business concerning the
ability to honour their commitments. Several businesses are left with no other
choices but to accommodate with inadequate and undistinguished options namely
contract termination due to non-performance, delay in supplies, re-negotiation
concerning prices or contracts terms & conditions, advances forfeited or
adjusted against a penalty for non-performance, etc.
The article aims to encapsulate germane issues faced by businesses concerning
default in contractual obligations due to COVID-19 and GST implication on same.
In case contract canceled due to non-performance during COVID-19,
however the advances against supply received before a pandemic. As per Goods and
Service Tax law in India, GST liability arises at the time of receipt of advance
against supply of goods/ services based on invoice/ receipt voucher.
In case, invoice
was issued at the time of receipt of the advance, the
supplier is eligible for a credit of GST paid on such advance by issuing the
credit note. The adjustment is required to be done in GSTR-1 mentioning the
credit note details and subsequently in GSTR-3B latest by the date of filing of
GSTR-9 in which the invoice was issued OR 30th September of the financial year
(FY) immediately succeeding the FY in which the invoice was issued whichever is
In case, receipt voucher
was issued at the time of receipt of the advance, the
supplier is required to file a refund claim of GST paid to the Government of
India. Since the contract is canceled, therefore GST deposited represents Excess
payment of Tax, therefore refund in RFD-01 to file accordingly.
Liquidated damages paid on cancellation of contract due to
non-performance or delayed a project as a result of COVID-19 impact. In case
liquidated damages are paid due to non-performance of the contract or delayed in
project, Entry 5(e) in Schedule II of the Central Goods and Service Tax Act (CGST
Act) gets attracted. Schedule II of CGST Act provides for activities to be
treated as supply of goods or services which categorically includes agreeing to
the obligation to tolerate an act or a situation
Further, in this respect Central Board of Indirect tax And Customs (CBIC) in one
of its sectorial FAQ series mentioned as under:
non-performance of a contract or breach of contract is one of the conditions
normally stipulated in the Government contracts for the supply of goods or
services. The agreement entered into between the parties stipulates that both
the service provider and service recipient abide by the terms and conditions of
In case any of the parties breach the contract for any reason including the non-
performance of the contract, then such person is liable to pay damages in the
form of fines or penalty to the other party.
Non-performance of a contract is an activity or transaction which is treated as
a supply of service and the person is deemed to have received the consideration
in the form of fines or penalty and is, accordingly, required to pay tax on such
Thus, GST is applicable on liquidated damages or penalty or fine or accidental
damages (by whatever name called) for non-performance of contract or delay in
supply of goods or service. A similar position has been taken by Maharastra AAR
in the case of North American Coal Corpn India (P.) Ltd. and in the case
of Maharashtra State Power Generation Company Ltd.
At this point, it is pertinent to mention here that few Advance Rulings are
holding a split view of taxability on liquidated damages. Moreover, globally, no
GST or VAT is levied on liquidated damages. Till the time, Government
clarification is issued in this respect, proper evaluation of contract is of
supreme importance in such cases.
However, it is to be noted that consideration received by the Government from
any person or supplier for non-performance of the contract is exempt from tax as
per GST law.
In a case where businesses offered discounts and took the pandemic
impact to save the contract. As per GST law in India, no tax is levied on
discounts agreed at the time of the contract between supplier and buyer, and
said discount amount is also reflected in the tax invoice. However, post-sales
discounts (i.e. any discount provided after the sale has taken place), GST will
not be levied on such discount only if the below conditions are met
- Such discount is established in terms of an agreement entered into at or
before the time of such supply
- Such discount is linked to the original invoice
- The recipient of the supplier has reversed the Input tax credit (ITC) of GST about said the amount of discount offered by the supplier via relevant
Further, Circular No. 92/11/2019-GST dated 07th March 2019 also observed that
there are discounts that are not known at the time of supply or are offered
after the supply is already over. A credit note will be issued with the discount
amount alone without GST in such a case. Nevertheless, Circular No.
105/24/2019-GST dated 28th June 2019 provides that it is crucial to examine the
true nature of the discount given by the manufacturer or wholesaler, etc. to the
Therefore till the time representations are presented before GST councils and
clarifications are passed in this respect, every discount offered to vendors
during COVID should be evaluated vis-a-vis identification of relevant clause in
the agreement/ contract to identify:
- The clause about discount policy if payment made within a prescribed
- The clause about cash discount policy
- The clause about a post-sale discount given by the supplier to the
dealer without any further obligation/ action required at the dealerís end.
- Any other similar/ related clauses.
In case interest paid on delay in payment of contract due to financial
crises and no/ slow turnover due to pandemic
As per GST law - Section 15(2) (d) of the CGST Act provides that value of
supply includes interest or late fee or penalty for delayed payment of any
consideration for any supply
Further, the Central Board of Indirect tax And Customs has clarified in its
Circular no 102/21/2019-GST dated 28th June 2019 that interest as well as penal
interest charged concerning the supply of goods and services shall be included
in the value of goods and services and will be liable to GST. Said circular
clarified with an illustration as mentioned below.
AMC Mart sells refrigerator to the customer XYZ having a price of INR 40,000/-.
Further AMC Mart provides an option to XYZ to pay the amount for the
refrigerator under an installment of INR 10000/- monthly over 5 months. Further,
if XYZ makes default in payment of installment of a loan then in such case an
additional amount of penal charges amounting to INR 500/- pm shall also be
collected from XYZ. Further AMC Mart will raise a separate invoice for recovery
of interest amount as embedded in monthly installments as well as for the amount
of penal interest.
As per the provisions of sub-clause (d) of sub-section (2) of section 15 of the
CGST Act, the amount of penal interest is to be included in the value of supply.
The transaction between AMC Mart and XYZ is for the supply of taxable goods i.e.
Refrigerator. Accordingly, the original amount of interest, as well as penal
interest, would be taxable as it would be included in the value of the
Refrigerator, irrespective of the manner of invoicing.
Time is crucial as the COVID-19 is still going on. Businesses must stimulate
internal policy as well as a strategy with the third party in executing current
and future dealings by re-evaluating the terms & conditions of the contract to
mitigate future litigation.