Be careful:Penal interest attracts GST – AAR Maharashtra
M/S. BAJAJ FINANCE LIMITED
Dated:- 06-08-2018 – GST-ARA-22/2018-19/B-85*
Penal interest– Taxable supply or not – activity of collecting penal interest by the Applicant – default in repayment of EMI – tolerate an act or a situation of default – penal interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017 Central Tax (Rate) dated 28.06.2017, Sr. No. 27 of Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06.2017, and Sr. No. 28 of Notification No. 9/2017 Integrated Tax (Rate) dated 28.06.2017.
Held that:– The Applicant, a non-banking financial company are providing various types of loan such as auto loans, loan against the property, personal loans, consumer durable goods loans, etc, to their customers and charge interest on such loans disbursed, for which they enter into agreements with borrower/customers. The agreements provide for repayment of the loan in the form of Equated Monthly Installments (EMI) vide cheque/ Electronic Clearing System (ECS), etc. – The EMI paid by the customers is a fixed amount payable at a specified date, which includes both interest and the principal amount. *In cases of delay in repayment of such EMI by the customers, the Applicant collects penal/default interest (penal interest), in terms of the agreements executed by the customers.* The same is calculated at a percentage not exceeding a fixed percentage, on the overdue loan amounts of the customer. The percentage of penal interest varies from customer to customer.
The amounts collected by the applicant from their customers are nothing but amounts towards Penalty / Penal Charges and can in no way be construed as additional interest. Such penalty/ penal charges are collected by them from their customers for the reason that the said customers have delayed the payment of EMI and the applicant has tolerated the said act of their customers of delaying payment of such EMI.
The applicant has agreed to do an act (the act of tolerating, of delayed payment of EMIs by their customers) and such act, by the applicant, squarely falls under clause 5(e) of the Schedule II mentioned above and therefore the amounts received by the applicant for having agreed to do such an act, would attract tax liability under GST laws – The receipt of penal charges on delayed payment of EMIS would be receipt of amounts for tolerating the act of their customers for having delayed/defaulted on their EMI payments within due dates. In view thereof, the same would definitely be a ‘supply’ under the GST Act and therefore, there arises an occasion to levy tax under the GST Act on the impugned transactions.
There is a clear understanding or agreement between the parties to foresee and tolerate an act or a situation of default on the part of loanees for a monetary consideration which is actually aconsideration received by the applicant, though in the agreement they may be giving this consideration, other names such as ‘penal interest’, penal charges, penalty, etc. as thought proper by them, but these different nomenclatures in their Agreement would in no way change the actual nature of monetary “consideration” which would clearly be taxable for the supply of services* as per Sr No. 5(e) of Schedule Il of the CGST Act, 2018.
The exemption for financial transactions under GST laws is only in respect of the interest/discount earned or paid for loans, deposits or advances. If the transaction, as in the subject case deviates from the above the same fails the test of being a “loan”, ‘“deposit” or “advance”, or the consideration is not an interest or discount, the exemption is not admissible – In the subject case the amount of penal charges cannot be said to form a part of interest on “loan”, “deposit or “advance”. It is recovered/imposed only because the loanee has delayed the payment of EMI (which consists of the principal amount and interest amount). This recovery of penal charges is made in view of toleration of the act of the loanee by the applicant and therefore construes as ‘supply’ as per as per Sr. No. 5(e) of Schedule II of the CGST Act and is therefore taxable under the GST Act.
Ruling:- The Penal Interest will not be treated as interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017Central Tax (Rate) dated 28.06.2017, Sr, No. 27 of Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06.2017, and sr. No. 28 of Notification No. 9/20171ntegrated Tax (Rate) dated 28.06.2017.
The activity of collecting penal interest by the Applicant would amount to a taxable supply under the GST regime – The said activity squarely falls under clause 5(e) of the Schedule II of the GST Act, 2018 and therefore such amounts received, would attract tax liability under GST laws.