GST on interest, late fees or penalty charged by the supplier on delayed payment
GST was introduced w.e.f. 1st July, 2017 and was brought with the object of simplifying the indirect tax system in India. Contrary to this, the GST laws have rather increased confusions and doubts owing to lack of clarity of the provisions. One such issue of confusion is the applicability of GST on interest, late fees or penalty charged by the supplier from the customer on delayed payment. It is a usual trade practice in India where the supplier of the goods charges interest from the customer if he delays the payment beyond the agreed credit period. In mandi trade, such practice is quite frequent and prevalent since long. The banks and NBFCs also recovers penal interest or penalties from their customers on default in payment of instalments timely. So, a number of questions arises in our mind as to applicability of GST on such interest or penalties recovered from the customer. We will try to answer those questions in this article.
Is interest, late fees or penalties charged by supplier forms part of ‘Value of Supply’ under GST?
‘Value of Supply’ is determined in accordance with Section 15 of CGST Act, 2017. Section 15(2)(d) of the Act clearly states that the 'value of supply' includes interest or penalty or late fees for delayed payment of any consideration for any supply. Hence, GST is payable on interest or late fees or penalties recovered by the supplier from the customer on delayed payments beyond the agreed credit period.
It should be kept in mind that services for providing loan where the consideration is represented by ‘interest’ is an exempt supply as per Notification No. 12/2017- CT (Rate) and No. 9/2017- IT (Rate) dated 28-06-2017. Therefore, no GST is chargeable on interest recovered by the banks or NBFCs on loans extended by them to their customers in the normal course of business. However, a question arises that if any penal interest is recovered by the banks or NBFCs on default by the customer in timely payment of EMI, will GST be leviable on such penal interest or not?
In reference to the above, there is an important advance ruling of Maharashtra AAR in the matter of Bajaj Finance Limited in which it has been held that penal interest recovered by the NBFC from the borrower for delayed payment of instalments is classifiable as services and therefore such amounts received, would be liable for GST. Such penal interest is not in nature of interest but an amount charged towards service of tolerating an act of default of the borrower in lieu of default charges. Further FAQs issued by CBIC in relation to ‘GST on Banking sector’ also clarifies that additional interest charged for default in payment of loan instalments will be includible in the value of supply and GST will be leviable thereon. In response to the controversial ruling of Bajaj Finance and numerous queries, the department came out with a circular dated 28-06-2019 [No. 102/2019].
Circular No. 102/2019 dated 28-06-2019
Doubts have been raised regarding applicability of GST on additional/ penal interest on the overdue loan i.e. whether it would be exempt from GST in terms of Sl. No. 27 of Notification No. 12/2017- CT (Rate) dated 28-06-2017 or such penal interest would be treated as consideration for liquidated damages [amounting to a separate taxable supply of services under GST covered under entry 5(e) of Schedule-II of CGST Act. In this respect, CBIC clarified as follows with the help of case studies as below:
Case-1: If seller himself grants EMI instalments:
Suppose, X sells a TV to Y at Rs. 10,000. However, Y makes payment in 5 EMIs of Rs. 2,500 each i.e. Rs. 12,500 in total. Further, if Y makes a default in payment of EMIs, an additional amount of penal charges Rs. 500 shall be payable by him. Further, X will raise a separate invoice for recovery of interest amount as included in monthly EMIs as well as for the penal interest.
Clarification: According to the Section 15(2)(d) of the CGST Act, the amount of penal interest is to be included in the value of supply. The transaction between X and Y is for supply of taxable goods i.e. TV. Therefore, the original amount of interest Rs. 2500 and penal interest Rs. 500 would be included as part of taxable supply and GST to be levied thereon at the rate applicable to the goods, whether separately invoiced or not.
Case-2: If loan is provided by a finance company to the buyer:
Suppose in above example, X sells TV to Y at Rs. 10,000 and finance is arranged from Bajaj Finance wherein Y will make payment in 5 EMIs of Rs. 2,500 each i.e. Rs. 12,500 total. An additional Rs. 500 shall be payable as penal interest if default is made in payment of EMI.
Clarification: The additional or penal interest is charged for a transaction between Y and Bajaj Finance and the same is getting covered under Sl. No. 27 of Notification No. 12/2017- CT(Rate) dated 28-06-2017. Accordingly, in this case, the penal interest charged thereon a transaction between Y and Bajaj Finance would not be subject to GST, as the same would be covered under Notification No. 12/2017- CT(Rate) dated 28-06-2017.The value of supply of TV by X to Y will be Rs. 10,000 only for purpose of GST. It is also important to note that if Bajaj Finance also collects some charges or fee such processing fees for extending loans, such charges shall not be considered as interest and therefore GST is leviable on such charges.
On the basis of above discussion, we shall conclude the following: -
The above circular put an end to all the confusions revolving around taxability of penal or additional interest upon making default in payment of loans. Further, the advance ruling in respect of Bajaj Finance Limited is also nullified by this circular. To conclude: -
(a) In case where the supplier of goods or services extends credit facility to its customer in any form whether regular credit/ EMI, any interest for extending such credit/loan or penal interest charged upon delayed payments, shall be included in the value of supply. Therefore, GST shall be chargeable on such interest/ penal interest/ late fees for delayed payments of consideration.
(b) Where the principal business is lending or granting of loan as in case of a NBFC or finance company or bank, the interest as well as penal interest on delayed payment of loan instalments shall form part of value of supply for them. Further, such penal interest shall be covered by Sl. No. 27 of Notification No. 12/2017 dated 28-06-2017 and therefore will be exempt from GST. However, processing fees or any other charges recovered for extending loan shall be liable for GST.
What will be the GST rates for interest/ penal interest/ late fees on delayed payment of consideration?
GST on interest or penal interest or late fees for delayed payment of consideration shall be charged at the same rate as applicable to principal goods or services supplied. For example, in our case-1 above, GST on interest/ penal interest shall be levied at the same rate as applicable to TV.
What in Time of Supply for interest/ penal interest/ late fees on delayed payment by customer?
As per Section 13(6) of the CGST Act, ‘Time of Supply’ in relation to an addition in the value of supply by way on interest, late fee or penalty for delayed payment of any consideration shall be the date on which the supplier receives such additional amount. In simple words, the liability to pay GST on interest/ penal interest arises only when the supplier actually receives such interest/ penal interest from the customer.
