GST Implications on Recovery of Liquidated Damages by Railways

Introduction

The Indian Railways is an essential part of the Indian transportation system. It is the largest rail network in Asia and the fourth largest in the world, with over 115,000 km of track and more than 7,000 stations. Businesses often rely on Indian Railways to transport their goods, and sometimes, due to various reasons, the railways are unable to deliver the goods on time. In such cases, the railways levy a penalty known as liquidated damages.

With the introduction of GST in India, the calculation of liquidated damages has become more complicated. In this article, we will explain how GST affects the calculation of liquidated damages and what businesses need to keep in mind when dealing with Indian Railways.

What are Liquidated Damages?

Liquidated damages are a pre-agreed amount that one party agrees to pay the other party in case of a breach of contract. In the case of Indian Railways, liquidated damages are levied when the railways are unable to deliver goods on time due to various reasons such as natural calamities, accidents, or theft. The purpose of levying liquidated damages is to compensate the railways for the losses incurred due to the delayed delivery of goods.

How is GST Calculated on Liquidated Damages?

According to the GST law, liquidated damages are considered as a supply of service and are liable to GST. The value of liquidated damages is calculated as a percentage of the value of the goods that were supposed to be delivered.

For example, if the value of the goods to be delivered was Rs. 1,00,000, and the agreed percentage for liquidated damages was 10%, then the amount of liquidated damages would be Rs. 10,000. GST would be calculated on this amount at the applicable rate.

Impact of GST on Recovery of Liquidated Damages by Railways

With the introduction of GST, the calculation of liquidated damages has become more complex. Earlier, businesses could claim input tax credit for the taxes paid on the liquidated damages. However, with the introduction of GST, input tax credit cannot be claimed on the tax paid on liquidated damages.

For example, if a business paid Rs. 10,000 as liquidated damages, and the applicable GST rate was 18%, then the total amount payable would be Rs. 11,800. However, the business cannot claim input tax credit for the GST paid on the liquidated damages. This means that the business would have to bear the entire cost of the liquidated damages without being able to claim any tax benefits.

How Can Businesses Deal with the Implications of GST on Liquidated Damages?

Businesses need to be aware of the GST implications on the recovery of liquidated damages by Indian Railways. They need to factor in the impact of GST when calculating the cost of delayed delivery of goods by the railways.

It is also advisable for businesses to negotiate the percentage of the liquidated damages with Indian Railways. Businesses can try to reduce the percentage of liquidated damages to compensate for the GST paid on the damages.

Conclusion

GST has made the calculation of liquidated damages more complex. Businesses need to be aware of the implications of GST on the recovery of liquidated damages by Indian Railways. They need to factor in the impact of GST when negotiating the percentage of liquidated damages with Indian Railways. By doing so, they can reduce the financial burden of liquidated damages and minimize the impact of GST on their business operations.