Recent Tax Developments

• Published date: 11 August 2022
• Subject Matter: Tax, Income Tax, Sales Taxes: VAT, GST
• Law Firm: Phoenix Legal
• Author: Mr Jatin Arora

Goods and Services Tax

1. The Government of India vide Circular No. - 178/10/2022 - GST dated 3rd August, 2022 clarified the applicability of GST on payments, which are typically penal in nature and arise out of a breach of contract or otherwise. Since the time GST was introduced in India, there was always a controversy around taxability of these charges such as liquidated damages, notice pay recovery, penalty cancellation charges, forfeiture of earnest money, penalty for violation of law, late payment surcharge etc. It has been clarified in the circular that payments such as liquidated damages in a contract, notice pay recovery or cheque bouncing charges, penalty by the statutory authorities in violation of the law, forfeiture earnest money deposit by buyer of immovable property etc. do not constitute consideration for a supply and hence are not subject to levy of GST.
   
   On the other hand, the circular also explains about those situations which are envisaged under the entry 5(e) and thus would be subject to levy of GST. In terms of the circular, the taxable events would include situations such as non-compete agreements penal charges for cancellation of bookings of a taxable service like travel or events where penalty is levied for last minute cancellation charges or amounts forfeited due to no show etc.

2. Supply of service by way of 'Renting of a Residential unit' was exempt from levy of GST until now. However effective from 18.07.2022 vide a new entry at Serial No. 5AA of Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017 the Government on the recommendations of the GST council has decided to bring the services of renting of residential dwellings, when rented to a registered business person. This would effectively make all company lease arrangements taxable under GST, whether taken by the registered businesses for their employees on long term or short term. The levy has been introduced under the reverse charge mechanism. Hence, the registered recipient person will pay the GST to the Government.
   
   Eligibility of the input credit of such GST paid under reverse charge would need to be analysed in terms of the applicable input credit restrictions. Besides, implications under income tax laws would also need to be analysed to understand whether going forward the companies should continue providing company lease vis a vis providing HR allowance to its employees and the related tax implications.

3. The Government of India has rescinded Notification...