# Schedule III – 'Non-supplies' (and CBIC Clarifications on Penal Charges)
Certain receipts that look like consideration are actually not a supply, hence no GST. Recent circulars have brought several penalty / compensation items into this list.
## A. Charges/penalties that are NOT supplies (no GST)
1. Penal charges levied by Regulated Entities (banks/NBFCs) on borrowers for non-compliance with loan terms — No GST.
2. Cheque dishonour fine / penalty charged by the supplier from a defaulting customer — Not taxable.
3. Penalty for violation of law (e.g. fines under statute) — Not taxable.
4. Forfeiture of salary / surety / bond amount by employer for breach of employment terms — Not taxable.
5. Late payment surcharge by utilities (electricity boards, telecom) — Not taxable as a separate supply. (When part of the price of the underlying supply, it follows the principal supply.)
6. Fixed/Capacity charges for power — Not taxable (electricity is exempt; capacity charges form part of the consideration for electricity, which is exempt).
7. Cancellation charges retained by the supplier when no service was rendered — generally not taxable; treated as compensation, not consideration.
## B. Liquidated Damages — A Three-Way Test
The treatment of liquidated damages depends on why they are paid:
| Situation | GST Treatment |
|---|---|
| Payment to make good a loss caused by the other party (true compensation) | Not taxable — no supply at all |
| Damages paid for performing/forming a contract (e.g. demurrage, retention amounts that are part of the contract consideration) | Exempt (or follows the rate of the principal supply, as applicable) |
| Damages arising under a separate independent contract to tolerate an act / refrain from an act | Taxable as supply of service (Schedule II, para 5(e)) |
Memory hook: Liquidated damages that are just compensation for breach = not taxable. But if there is an independent agreement to tolerate something, that is a separate taxable service.