LIQUIDITY CRUNCH IN BANKING SECTOR
In the recent judgment given by the advance ruling authority which may affect the liquidity crunch in the banking industry, before ruling there is some dubious among the industry members on Penal interest charged by the banks. Some said that GST should be charged on penal interest while some said it is a part of interest and hence not liable to GST. Such dubious among the industry has been cleared by the Advance ruling judgment.
Fact of the case:
1) In the said case, Bajaj Finance Limited (BFL) gave loan to customers for a specific period repayable in EMIS including principal and interest amount. Failure to pay within the due date attracted penalty charges based on a certain percentage.
2) In the process, BFL agreed to tolerate the act of delayed payment in lieu of penalty.
3) According to BFL, In notification no 12/2017- Central tax (Rate) dated 28.06.2017,which includes exemption of various services One such supply that is exempted is services by
way of extending deposits, loans or advances and the consideration is exempt by way of interest or discount.
4) Based on the exemption and its interpretation that such penal interest is nothing but additional interest, the view was that penal interest too shall not be subject to GST
5) Also in the pre GST era, means in service tax regime interest on loans was excluded fromvalue of taxable services by way of Service Tax (Determination of Value) Rules,
2006.Interest on loan was exempted under Negative List clause (n) of Section 66D. The negative list shall comprise of the following services, namely-
– Services by way of-
– extending deposits, loans or advance in so far as the consideration is represented by way of interest or discount"
The judgment was passed on the basis of following which may lead to argument:
1) FAQs on Banking Sector1, issued by GST Council, clarified that additional interest charged on delay or default in payment of installment by the customer shall be included in the taxable value of supply.
2) Schedule II, entry 5 of CGST Act, includes services in the scope of supply as "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act ". Thus, it is contended that there is a service of tolerating an act because there is toleration of the act of default or situation of default of the borrower by the Lender in exchange for default charges named as penal interest.
3) The nomenclature does not alter the substance of the transaction. Penal charges are charges on over-due amount. Thus, penal charges fall within the scope of supply under the CGST Act, section 7.
4) It is also held that EMI calculation is done based on the amount of loan and the total tenure of loan. Interest is calculated keeping in mind the total life of the loan over which the principal shall be outstanding as reduced by the instalments paid. Delay or default in payment of EMI is not factored in.
5) The contention, that it is separately charged and, hence, it is in the nature of interest, is invalid. This is because the percentage of charge is on a per month basis of default. It does not encompass the entire life of the loan. It arises only when there is a default or delay and it is calculated for that period of delay.
Effects on Banking/Financial sector:
1) Banks are already facing the burden of Non Performing Asset (NPA) and this new addition in the scope of GST may create additional burden on it.
2) This may also increase the cost of funds either of the banks or borrower depends on the policy of various banking. The effect of this may also increase liquidity issues and ultimately effect on working ca pital.
3) In case of distressed loans, where recovery of principal itself is questionable, expecting the borrower to cough up another 18% on the penal interest is highly irrational.
4) This may also lead to the further litigation in various forum and courts.