Is GST charged on liquidated damages for delay?

Yes. When the contract treats delay as something the employer agrees to tolerate for a price, LD is a taxable supply under Schedule II, 5(e).

Are liquidated damages a separate supply or just a price cut?

They are distinct obligations for tolerating delay. Deducting LD from invoices does not reduce the value of the main supply.

When does the time of supply arise for LD?

When the delay is established under the contract. On confirmation of delay, GST liability for LD is triggered.

Can the contractor claim ITC on LD-related GST?

ITC depends on contract terms and eligibility rules. The ruling focuses on taxability of LD; ITC must follow normal GST conditions.

Does every contract delay attract GST?

Only where the contract creates a consideration for tolerating the delay. The nexus must be clear in the agreement.

Re: Maharashtra Power Generation Ltd

Maharashtra AAAR 2018–19 MAH/AAAR/SS-RJ/09/2018-19 GST ~7 min read

Author: Gulzar Hashmi India Published: 02 Nov 2025

GST on LD Tolerating an Act Time of Supply

Quick Summary

The Maharashtra AAAR held that liquidated damages (LD) for delay are taxable under GST as consideration for tolerating an act (Schedule II, 5(e)). LD is not a mere price cut to the main contract. GST applies when the delay is established as per contract.

Code: MAH/AAAR/SS-RJ/09/2018-19
Forum: Maharashtra AAAR

Key Provision: Schedule II, 5(e) — Tolerating an Act
Trigger: Time of supply on confirmed delay

Issues

Is GST applicable on LD for delay in contract performance?
Is LD an independent supply or just an adjustment to the contract price?
When does the time of supply arise for LD?
Does LD-related GST allow input tax credit (ITC) to the contractor?

Rules

LD for delay is taxable as a supply for agreeing to tolerate an act (Schedule II, 5(e), CGST Act).
Taxability depends on the contract wording and the presence of consideration for tolerance.
Time of supply is linked to the point when the delay is established under the agreement.
ITC eligibility follows regular GST rules and the contract’s tax mechanics.

Facts (Timeline)

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Project & Parties: Maharashtra State Power Generation Co. Ltd. hired contractors for plant works, including BHEL for erection, testing, and commissioning.

Schedule & LD: Unit 1 in 41 months; Unit 2 in 44 months. LD at 0.5% per week of contract price, capped at 10%.

Advance Ruling: Applicant sought clarity—claimed LD is compensatory, not a supply.

AAR View: Held GST applies—LD equals tolerance service.

Appeal: Appellant argued LD only adjusts transaction value, not a separate supply.

AAAR Outcome: Upheld taxability under tolerating an act; time of supply on established delay.

Timeline visual for Maharashtra Power Generation LD GST ruling

Arguments

Appellant (MSPGCL)

LD is compensation for breach-caused loss, not a taxable service.
Deducting LD from invoices shows price adjustment, not separate supply.

Respondent / AAR Position

Contract allows delay in exchange for LD; that is tolerating an act.
LD stands apart from the main works contract; GST is payable when delay is confirmed.

Judgment

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The AAAR affirmed AAR: LD for delay is taxable as a supply of tolerating an act. LD does not reduce the value of the main supply. GST liability arises when the delay is established under the agreement.

Judgment visual for GST on liquidated damages in Maharashtra AAAR ruling

Ratio (Legal Principle)

Where the contract provides consideration for allowing delay, the payer supplies a service of tolerating the act of delay. That consideration (LD) is taxable under GST. The time of supply tracks the point when the delay is proved under the contract.

Why It Matters

Gives a clear test for LD taxability under GST.
Guides drafting of delay clauses and invoicing mechanics.
Helps determine timing of GST liability on LD.

Key Takeaways

LD for delay can be a taxable service: tolerating an act.
LD is separate from the main supply’s price.
Time of supply: when delay is confirmed per contract.
ITC: follow standard eligibility and contract specifics.

Mnemonic + 3-Step Hook

Mnemonic: “DELAY? PAY. GST.”

DELAY allowed by contract,
PAY LD as consideration,
GST on tolerance service.

3-Step Hook

Read the delay clause.
Check if it creates tolerance for a price.
If yes, compute GST when delay is established.

IRAC Outline

Issue	Rule	Application	Conclusion
Are LDs for delay taxable, and when?	Schedule II, 5(e): supply by tolerating an act; time of supply on confirmed delay.	Contract sets price-linked LD for delay; employer tolerates delay for consideration.	LD taxable under GST; liability arises when delay is established.

Glossary

Liquidated Damages (LD): Pre-agreed sum for delay or breach.
Tolerating an Act: Accepting an offending act for consideration.
Time of Supply: Point when GST liability arises for a supply.

FAQs

Only when the contract shows the employer tolerates delay for consideration. The facts and wording matter.

No. In this ruling, LD is separate from the primary supply value; it is consideration for a different obligation.

When the delay is confirmed under the contract’s procedure—this marks the time of supply.

Subject to general ITC rules and contract. The ruling highlights taxability; ITC depends on eligibility provisions.

Publication & SEO Block

CASE_TITLE: Re: Maharashtra Power Generation Ltd (MAH/AAAR/SS-RJ/09/2018-19)
PRIMARY_KEYWORDS: GST on liquidated damages; tolerating an act; time of supply
SECONDARY_KEYWORDS: input tax credit; contract delay; Schedule II 5(e); Maharashtra AAAR