By S&S Co. Advocates & Solicitors · Published 16 June 2026 · Informational content, not legal advice
About this article: A general explainer prepared by S&S Co. Advocates & Solicitors on a recurring type of dispute. It does not report a specific judgment or order, names no parties and gives no case citation, so it should not be cited as authority. Law and practice change; please verify against the current statute and primary sources before relying on it.
A recurring GST dispute is whether a payment made on breach of contract, such as liquidated damages, forfeiture of earnest money or a penalty, is consideration for a separate supply of 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation' under Schedule II of the CGST Act, 2017, and so attracts GST in its own right.
The CBIC has addressed aspects of this in its circulars, and the broad position taken is that compensation for loss caused by a breach is not, without more, consideration for a separate supply. The reasoning is that such payments compensate for loss or deter breach rather than pay for a service of tolerating it. Anyone relying on a particular circular should read its exact text and date, because the position has been stated in different contexts.
A label does not decide the matter. Where the substance of an arrangement is that one party pays for the right to continue to default or not to perform, tax authorities may argue that the payment is consideration for a taxable supply. The commercial purpose and structure of the clause are therefore examined, not just its heading.