The Karnataka Authority of Advanced Ruling (AAR) ruled that damages from tenant towards termination of sub-lease before end of lock-in period amounts to consideration for supply and that 18% Goods and Service Tax (GST) is applicable.
The issue to be decided was whether damages received by the applicant amounting to Rs.1,85,00,000/- from the tenant towards the termination of sub-lease before the agreed upon.
Lock-in period as per the sub-lease deed agreements dated 3rd November 2021 and 11 January 2022 tantamount to supply as per Section 7 of Central GST Act, 2017 and will the amount received towards damages for Rs.1,85,00,000/- as per the settlement agreement dtd;18-04-2023 to be construed as Consideration for the above supply.
The applicant disclosed leasing two premises from different landlords and subletting to Novocura Tech Health Services Pvt. Ltd. Facing client incapacity to uphold agreements, they amicably terminate, with the client paying damages. Amounts received include forfeited security deposits of Rs. 1,19,00,000/- and Rs. 16,00,000/-, plus Rs. 50,00,000 in damages from July 2022 to January 2023.
In a recent statement, it was emphasized that the Centrsl Goods and Services Tax Act, 2017, and the Karnataka Goods and Services Tax Act, 2017, share parallel provisions, differing only in specific aspects.
The authority, after reviewing an advance ruling application, addresses the case of party subletting commercial properties. The applicant, having leased premises to tenant, received damages for early contract termination.
The ruling delves into whether these damages constitute a taxable supply under GST, examining the contractual agreement’s terms and conditions. It highlights the awareness of both parties regarding potential liabilities in the event of agreement breach, indicating that the received amount pertains to non-fulfillment of stipulated conditions in the lease agreement.
In the realm of taxation, it’s emphasized that payments labeled as fines or penalties are subject to GST if they constitute consideration for a supply. Such payments, even though termed fines, are deemed consideration for facilities like accepting late payments, terminating leases early, or pre-paying loans, as outlined in contracts. If the principal supply is taxable, these ancillary payments are eligible for GST. Exemptions apply if the principal supply is exempt.
The two-member bench of the Additional Commissioner of Commercial taxes Dr. M.P. Ravi Prasad and Additional Commissioner of Customs and Indirect Taxes, Kiran Reddy.T ruled that the damages received by the applicant from the tenant for terminating a sublease before the agreed lock-in period are deemed a supply under Section 7 of the Central GST Act, 2017.
It was thus ruled that, The amount received as damages, per the settlement agreement, is considered as consideration for this supply. The services provided by the applicant fall under Chapter heading 9972, attracting GST at 18% (comprising 9% CGST and 9% SGST).
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