A Follow-up to Our Booking Advance Analysis: The Law Now Speaks with Authority
Introduction
Following our detailed legal analysis on the GST implications of booking advance forfeiture—especially in cases where the sale does not materialize—a crucial development has emerged. In a decisive ruling dated 28 April 2025, the Maharashtra Authority for Advance Ruling (AAR) has provided judicial clarity that strongly supports the CBIC’s position as laid out in Circular No. 178/10/2022-GST.
This post captures the key takeaways from the ruling in the case of Maharashtra State Electricity Transmission Company Ltd., connecting them to the broader statutory and compliance framework we previously discussed.
Key Ruling: Forfeiture and Penalties Are Not 'Supply' under GST
In this case, the AAR held that:
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Forfeiture of Security Deposits or Earnest Money, due to contractual default, is not consideration and not a supply of service.
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Liquidated damages or penalties recovered from vendors for breach of contract do not involve supply, and hence, are outside the scope of GST.
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Accounting write-backs of old unclaimed balances or forfeited deposits are mere adjustments, not linked to any deliverable or service, and hence, not taxable.
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Imposition of contractual penalties for non-performance does not involve any exchange or agreement to tolerate an act, unless specifically contracted.
This ruling gives legal backing to what was earlier a departmental clarification, making it highly relevant for businesses across sectors.
Consistency with CBIC Circular No. 178/10/2022-GST
The AAR ruling follows and strengthens the CBIC’s guidance, which laid down the following conditions for taxing forfeiture under Schedule II, Entry 5(e):
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There must be a binding agreement or contract.
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The forfeiture clause must be clearly mentioned and mutually accepted.
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The forfeiture must be a consideration for tolerating cancellation or breach.
Absent these factors, forfeiture does not amount to a taxable supply. This is a vital relief for businesses making routine booking adjustments or writing back deposits.
Implications for Businesses – What You Need to Do Now
✅ When GST Is Not Applicable:
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No supply is made;
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No invoice is issued;
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There is no agreed contractual obligation to tolerate breach;
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Forfeiture is unilateral and without mutual consideration.
✅ When GST May Be Applicable:
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If your booking or contract explicitly states that forfeiture is in lieu of cancellation and the business is contractually agreeing to tolerate;
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In such cases, GST should be discharged under SAC 9997 (Other services).
Practical Action Points for Compliance
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Revisit and revise booking forms to avoid vague forfeiture clauses.
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Document non-performance and absence of tolerance obligations clearly.
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Avoid raising GST invoices unless a supply has occurred or an obligation to tolerate has been explicitly agreed.
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Classify forfeited income appropriately in your books to distinguish supply from adjustments.
Conclusion
The AAR ruling now decisively closes the ambiguity around GST liability on forfeitures where no real supply or contractual tolerance exists. The message is clear: not all forfeitures are taxable, and only those linked to a clearly defined supply obligation under the contract will attract GST.
This provides a much-needed framework for businesses, especially in sectors such as automobiles, real estate, and energy, where such transactions are frequent.
