RCM on interest paid on delayed payment of import invoices
Under GST law, the importer of services is liable to pay IGST on import of services under Reverse Charge Mechanism (RCM). It means that in case you make import of any services from any other country into territory of India, you will have to pay IGST on the value of such import. However, you will be eligible to take input tax credit of IGST so paid and utilize it for discharge of your output tax liability.
As RCM is applicable on import invoices, a question further arises as to whether “GST is payable under RCM if any penal interest is paid against delayed payment of import invoices”. In this regard, we will refer to an advance ruling of Gujarat AAR which answered “yes” in this matter.
In the matter of M/s Enpay Transformer Components India Pvt. Ltd. [Advance Ruling No. GUJ/GAAR/R/01/2021], the Gujarat Advance Ruling Authority observed as follows:
According to Schedule-II to the CGST Act read with section 7(1)(d), the following shall be treated as a supply of services namely:
(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;
On going through the above, it is observed that the foreign supplier has tolerated the act of receiving payment after a lapse of a period of 120 days from the date of invoice in respect of which interest is to be paid by the importer. Thus, the act of tolerating delayed payment against interest will be covered under the supply of services under Entry No. 5(e) as specified above which reads as “(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.”
The authority further referred section 15 of the CGST Act, 2017 which states as follows:
Section-15(2): The value of supply shall include-
(d) “interest or late fee or penalty for delayed payment of any consideration for any supply.”
The reading of the section 15(2) suggests that the value of supply includes interest or late fee or penalty for delayed payment of any consideration for any supply. Therefore, it can be concluded that the payment of interest for delayed payment of import invoices will be covered under Entry No. 5(2)(e) of the Schedule-II to the CGST Act, 2017 and is liable to GST in view of the provisions of Section 15(2)(d) of the CGST Act.
Therefore, GST is payable on interest paid towards delayed payment of import invoices and such GST shall be payable under RCM. The rate of GST on such interest shall be the same as that of the GST rate applicable on the goods purchased under the import invoice.
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