Washout Charges or Liquidated Damages in GST

Washout charges or liquidated damages are the charges levied on the supplier for the cancellation of their order by the buyer. This article covers all the details to understand washout charges in GST. It includes the meaning of washout charges, when they are applicable, calculation of washout charges, and their impact on buyer and supplier.

What are Washout Charges?

Washout charges are a type of liquidated damages. Liquidated damages are the amount of money specified in the contract, which the parties agree to pay in case of breach of contract by any party. The purpose of this clause is to compensate the non-breaching party for the loss suffered by them due to the breach of the contract.

In the case of GST, washout charges are the charges levied by the supplier for the cancellation of the order by the buyer. These charges are levied to compensate the supplier for the loss suffered by them due to the cancellation of the order.

When are Washout Charges Applicable?

Washout charges are applicable when the buyer cancels the order placed with the supplier. The cancellation can be due to various reasons such as change in the requirement, delay in the project, or any other reason.

It is important to note that washout charges are applicable only when they are specified in the agreement between the buyer and the supplier. If the agreement does not specify washout charges, then the supplier cannot levy them on the buyer.

Calculation of Washout Charges

The calculation of washout charges is based on the terms agreed between the buyer and the supplier. It is usually a percentage of the total order value. The percentage is decided based on the time of cancellation and the reason for cancellation.

The calculation of washout charges is based on the following formula:

Washout Charges = Percentage of order value x Order value

For example, if the percentage of washout charges is 10% and the order value is INR 1,00,000, then the washout charges will be INR 10,000.

Impact of Washout Charges on Buyer and Supplier

The impact of washout charges on the buyer and supplier is different. For the buyer, washout charges can increase the cost of the project. If the buyer cancels the order due to the change in requirement, then the cost of the new order will increase due to the washout charges levied on the cancelled order.

For the supplier, washout charges are a way to protect them from the losses suffered due to the cancellation of the order. These charges compensate the supplier for the loss of revenue and the impact on their production and supply chain.

Conclusion

Washout charges or liquidated damages are the charges levied on the supplier for the cancellation of the order by the buyer. These charges are levied to compensate the supplier for the loss suffered by them due to the cancellation of the order. The calculation of washout charges is based on the terms agreed between the buyer and the supplier. It is important to note that washout charges are applicable only when they are specified in the agreement between the buyer and the supplier.