Refrain from Act or tolerating an Act :
Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act is supply of service – para 5(e) of Schedule II of CGST Act, read with section 7(1)(d) of CGST Act.
[similar provision in Section 66E(e) of Finance Act, 1994 where it was defined ‘declared service’]
This should cover following under GST net.
♦ Demurrage charges for not clearing goods within prescribed period.
♦ Cancellation charges charged by hotels, airlines, builders, contractors etc.
♦ L D Charges (Late Delivery Charges)
♦ Non-compete fees payable for agreeing not to compete for particular period.
♦ Forfeiture of deposit or advance as penalty (like quality, late delivery, violation of any term ofcontract etc.)
♦ Agreeing not to appear for opposite party in Court.
♦ Penalty for breach of contract.
Advance forfeited for cancellation of agreement, security deposits forfeited for damages done, demurrage are subject to service tax (now GST) – Para 2.3.2 of CBE&C’s ‘Taxation of Services : An Education Guide’ published on 20-6-2012.
Departmental clarification – Para 2.2.8 of Annexure A of MF(DR) TRU DO F. No. 334/1/2012-TRU dated 16-3-2012 has clarified as follows –
Returnable security deposit is not taxable. However, if deposit is forfeited, it would be taxable. No service tax (now GST) is payable on fines and penalties for violation of law. Demurrage payable for use of service beyond period is taxable.
Non-compete fees would be subject to service tax (now GST)- Para 6.7.1 of CBE&C’s Taxation of Services : An Education Guide’ published on 20-6-2012.
Non-compete fees under income tax – Non-compete fees has been specifically included as business income as per section 28(va) of Income Tax Act. Earlier, in Gillanders Arbuthnot & Co. Ltd. v. CIT (1964) 53 ITR 283 (SC), it was held that non-compete fees is a capital receipt and hence not taxable under Income Tax Act – quoted and explained in GufficChem P Ltd. v. CIT (2011) 198 Taxman 78 = 10 105 = 332 ITR 602 (SC).
Notice pay recovered from employee – If an employee leaves job without giving required notice, Notice pay is recovered from employee. On such amount, service tax (now GST) has to be charged and paid by the employer. This is actually supply of service of tolerating an act or situation provided by employer to employee. This is not a reverse charge. The employer cannot avail Cenvat credit of such service tax charged to and recovered from employee.