GST on Liquidated Damages: Gujarat Advance Ruling GUJ/GAAR/R/2025/47
The Gujarat Authority for Advance Ruling decided that liquidated damages paid for contract breaches are not subject to GST.
- Ruling
- GUJ/GAAR/R/2025/47 dated 03.11.2025
- Dated
- 03 Nov 2025
- Authority
- Authority for Advance Ruling
This page was written by Patron Accounting’s AI from the official release and reviewed before publishing. It explains the document in plain language. It is not the document itself. Where this page and the original differ, the original governs.
The short version
- The company asked if GST applies to liquidated damages paid for contract breaches.
- The Authority ruled these payments are not taxable under GST.
- Liquidated damages are compensatory, not a payment for a service or supply.
In short
The company asked the Gujarat Authority for Advance Ruling (GAAR) if they must pay Goods and Services Tax (GST) on liquidated damages paid to a municipal body for failing to meet contract obligations. The authority decided that these payments are not a supply of services and therefore do not attract GST.
What has changed
How it worked before
Businesses were often uncertain if penalty payments or liquidated damages for contract breaches should be treated as a 'service' of tolerating a breach, which would make them taxable.
What has changed
The authority clarified that genuine pre-estimated losses paid as damages are simply compensation for injury or loss. Because there is no agreement to 'tolerate' a breach in exchange for money, these payments do not qualify as a taxable supply under GST law.
Who this affects
Businesses that pay or receive liquidated damages for breach of contract or non-performance of obligations.
An example
Imagine a construction firm that pays a penalty to a client because a project was delayed. The firm might wonder if they owe GST on that penalty payment. Based on this ruling, if the payment is purely to compensate for the delay and not for a separate service, it is likely not taxable. The firm should document the contract terms to prove the payment is a genuine pre-estimated loss.
What you should do
This ruling only applies to the specific company that asked the question. If you are in a similar situation, you cannot automatically stop paying GST on such damages; you should consult your tax advisor to see if your specific contract terms match this ruling's logic.
If you do nothing
If you assume this ruling applies to you and stop paying GST on damages, your local tax officer may disagree and issue a demand notice. You would then face the cost of defending your position in legal proceedings, including potential interest and penalties if you are found to be wrong.
The terms explained
- Liquidated damages
- A pre-determined amount of money specified in a contract that one party pays to the other if they fail to meet their obligations.
- Supply
- Any form of sale, transfer, or exchange of goods or services made for a price, which is the basis for charging GST.
- Input tax credit
- The tax a business pays on its own purchases, which it can use to reduce the tax it owes on its own sales.
The ruling in detail
Authority for Advance Ruling
M/s. JBM Ecolife Mobility Surat Private Ltd.
GUJ/GAAR/R/2025/47 dated 03.11.2025 · Gujarat
Questions before the authority
- Whether the GST is payable on the liquidated damages paid by the Applicant to SSL for various material defaults, breaches or non-performance of the obligation as per the terms and conditions of the Concession Agreement, under the provisions of GST law?
- If the answer to above question is in affirmative, what shall be the applicable rate of GST thereupon and the corresponding Service Accounting Code (SAC)?
- If the answer to question no. 1 is in affirmative, whether the applicant is eligible to avail ITC of the GST so paid to SSL on liquidated damages?
Facts
The applicant is a Special Purpose Vehicle engaged in the procurement, operation, and maintenance of electric buses for the city of Surat under a Concession Agreement with the Surat Municipal Corporation, later transferred to Sitilink Limited (SSL). The agreement includes clauses for liquidated damages payable by the applicant to SSL for material defaults, breaches, or failure to perform obligations. The applicant sought a ruling on whether these payments are subject to GST.
Ruling
| Question | What the authority ruled |
|---|---|
| GST on liquidated damages | No For the reasons mentioned in the order |
| Applicable rate of GST and SAC | Not required to be answered In view of the answer to question 1 |
| Eligibility to avail ITC | Not required to be answered In view of the answer to question 1 |
The Authority ruled that the liquidated damages paid by the applicant to SSL are not subject to GST. Consequently, the remaining questions regarding the applicable rate of GST and the eligibility to avail Input Tax Credit were not required to be answered.
Reasoning
The Authority reasoned that the liquidated damages are a **genuine pre-estimated loss** and not a consideration for any independent activity or for tolerating a breach. Relying on CBIC Circular No. 178/10/2022-GST, it held that such payments are merely a flow of money to compensate for injury or loss and do not constitute a supply. The Authority also noted that there was no agreement, express or implied, to tolerate an act or refrain from doing anything in exchange for these payments.
Provisions relied on
- Section 7 of the CGST/GGST Act, 2017
- Section 95(c) of the CGST/GGST Act, 2017
- Section 97(2) of the CGST/GGST Act, 2017
- CBIC Circular No. 178/10/2022-GST dated 03.08.2022
- CBIC Circular No. 245/02/2025-GST dated 28.01.2025
For the practitioner
This ruling confirms that liquidated damages paid for breach of contract are **not taxable** under GST, provided they are compensatory in nature and not consideration for a separate supply. It reinforces the principle that such payments do not constitute 'tolerating an act' under the GST regime. Practitioners can use this to defend against tax demands on penalty or damage payments in similar commercial contracts.
Source
This is a summary prepared from the published order, which is a scanned document. It is a reading aid and not the authority: where the two differ, the order governs. Verify every provision against the original before relying on it.
Original order: https://www.gstcouncil.gov.in/sites/default/files/AAR/47_jbm_ecolife_mobility_surat_private_limited_removed_compressed.pdf
Legibility of the scan, as read: high.
Prepared 15-10-2026.
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