Paying GST to cancel hotel reservations
Clarifications, in particular those relating to “the applicability of the goods and services tax (GST) on damages, indemnities and penalties resulting from a breach of contract or other provisions of the law” , are a mixed bag for the common man. Under the GST laws, “accepting an obligation to refrain from an act or to condone an act or to perform an act is a rendering of a service” and therefore taxable. One of the precise circulars Applicability of GST on cancellation fees in a variety of scenarios.
Accountant Sunil Gabhawalla states: “The circular kindly analyzes that the transport ‘service’ begins with the booking of the ticket and lasts at least until the passenger exits the destination terminal. If at the time of the reservation, consideration is paid and the passenger has the possibility of canceling the reservation for a fee, in the event of cancellation, these costs which are withheld become themselves consideration. Cancellation charges are subject to GST at the rates applicable to the intended principal supply. ”
The flyer illustrates that cancellation fees for a first class or AC coach ticket would be subject to 5% GST, which is the rate levied on the ticket. The same logic would apply to cases such as the cancellation of an air trip or a hotel room, where the cancellation charge would be taxed at the same rate of GST as that applicable to the main service. However, if the seller has obtained an earnest money (deposit) from a potential buyer, for example for the intended sale of a property, and the transaction fails, no GST is payable on the forfeited earnest money. Confiscation is compensation for losses suffered and “not consideration for condoning breach of contract,” the circular explains.
“When the deposit is forfeited, the supply has simply not commenced and therefore the forfeited deposit is not taxable consideration,” says Gabhawalla.
Payment in lieu of notice
When an employer recovers a sum in the form of forfeiture of wages or recovery of the amount of the deposit when an employee leaves before the notice period, it is “not a consideration for condoning the act of premature resignation of the employee”. ’employment,’ the circular reads.
“The Advance Rulings Authority of Gujarat in the case of Amneal Pharmaceuticals ruled that the collection of notice pay is liable to GST. The circular, which states that it is not taxable, is likely to put an end to allegations of non-payment of GST on the recovery of notice allowances faced by many multinationals,” says Harpreet Singh, Indirect Tax Partner at KPMG-India.