Section 7(1A) read with schedule II of the Central Goods & Service Tax Act, 2017 (CGST Act), prescribes that “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” shall be treated to be a supply of service under the act. The same provision was also in place in the erstwhile tax regime under section 66E(e) of the Finance Act, 1994.
The above-mentioned provision means that if a person agrees to tolerate an act or situation, such person acts as a service provider in exchange for a consideration paid by the service recipient. For example, A and B entered into a contract with a clause of liquidated damages in which the defaulting party needs to pay the damages to the non-defaulting party. In this case, it is tough to determine the nature of payment to be compensatory or in the nature of a consideration to a separate supply of service, i.e., tolerating an act that is in default by the party.
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