Applicability of GST on De-escalation clause and on recovery of security deposit amount as per the contract

Applicability of GST on De-escalation clause and on recovery of security deposit amount as per the contract

1.0 FACTS OF THE CASE 

1.1 In an ongoing business, especially when dealing with contract, contract price revision is very common. Many contracts often have an escalation clause which permits the seller to increase the contract value when the cost of material increase as due course of contract and it is commonly used in construction contract. Whereas; De-escalation clause in a contract calls for price decrease if there is decrease in certain costs.

1.2 Assessee has made de-escalation clause with contractor reduced the value as per the contract.

2.0 DEFINITION OF DE-ESCALATION CLAUSE.

2.1 A de-escalation clause is an article in a contract that calls for a price decrease if there is a decrease in certain costs.

2.2 De-escalation refers to behavior that is intended to escape escalations of conflicts. It may also refer to approaches in conflict resolution. Escalations of commitment are often hard from spiraling out of proportion without specific measures being taken.

3.0 QUERY.

3.1 What is the treatment in GST while recovering the amount from Security deposit refundable on de-escalation clause?

4.0 CLARIFICATION.

4.1 Security Deposit is a kind of guarantee amount. It is made against a promise to act a particular manner based on a contract. Therefore this is a returnable amount on completion of a contract.

4.2 GST is attracted only on the transaction value of the deal that is completed as part of the contract and not on the security deposit.

4.3 In the case of de-escalation clause the value of contract to be deficient in future. Simultaneously the value of goods or services or both supplied should be decreased accordingly.

Applicability of GST on De-escalation clause and on recovery of security deposit amount as per the contract

5.0 GOODS AND SERVICES TAX (GST).

5.1 As per sections 34(1) of the CGST Act, provides; where a tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient ,or where goods or services or both supplied are found to be deficient, the registered person , who has supplied such goods or services or both, may issue to the recipient a credit note containing the prescribed particulars.

5.2 As per sections 34(2) of the CGST Act provides any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than September following the end of the financial year in which such supply was made or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such prescribed particulars.

Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

6.0 REQUIREMENT OF CREDIT NOTE IN GST.

6.1 A supplier of goods or services or both is mandatorily required to issue a tax invoice. However, during the course of trade or commerce, after the invoice has been issued there could be the following situation:

(I) The supplier has erroneously declared a value which is more than the actual value of the goods or services provided.

(II) The supplier has erroneously declared a higher tax rate than what is applicable for the kind of the goods or services or both supplied.

(III) The quantity received by recipient is less than what has been declared in the tax invoice.

(IV) The quality of the goods or services or both supplied is not to the satisfaction of the recipient thereby necessitating a partial or total reimbursement on the invoice value.

(V) Any other similar reasons.

6.2 In order to regularize these kinds of situations the supplier is allowed to issue what is called as credit note to the recipient. Once the credit note has been issued the tax liability of the supplier will reduce. Therefore, the issuance of credit note by supplier is required to settle the correct transaction between supplier and purchaser in the GST regime.

7.0 PRINCIPLES OF ADJUSTMENT OF TAX LIABILITY.

7.1 The claim of reduction in output tax liability by the supplier that matches with corresponding reduction in the claim for input tax credit by the recipient shall be finally accepted and communicated to the supplier. The reduction in output tax liability of the supplier shall not be permitted, if the incidence of tax and interest on such supply has been passed on to any other person, which earlier said on section 34(2) of the CGST Act.

 Note: The seller can reduce his tax liability only if the buyer has reduced the input tax credit claimed by the same amount.

7.2 The principle of unjust enrichment or reduction in output tax liability of the supplier will not be allowed if the incidence of tax has been passed on to another person. The concept of unjust enrichment is that no one can enjoy gains unjustly at the expense of another.

8.0 CONCLUSION.

8.1 In my point of view; the supplier should be document issued in the name of ‘credit note’ to the recipient regarding the aforesaid clause and documentation properly.

8.2 Security deposit (SD) amount should be refunded to the supplier after completion of work according to the contract and no need of adjustment of SD amount against invoice amount.

Applicability of GST on De-escalation clause and on recovery of security deposit amount as per the contract

Disclaimer: “This article is for the purpose of information and shall not be treated as a solicitation in any manner and for any other purpose whatsoever. It shall not be used as a legal opinion and not be used for rendering any professional advice. This article is written on the basis of the author’s personal experience and provision applicable as on the date of written of this article. Adequate attention has been given to avoid any clerical/arithmetical error, however, if it still persists kindly intimate me to avoid such error for the benefit of other readers”.

Applicability of GST on De-escalation clause and on recovery of security deposit amount as per the contract

Thanks & Best Regards

SANTOSH BEHERA

CMA-FINAL,B.COM(HONS)          

Comments (6)

  1. Santosh behera

    Reply

    Thank you pratap babu…for you support and your professionalism.

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