Clarification regarding applicability of GST on additional / penal interest
Various representations have been received from the trade and industry regarding
applicability of GST on delayed payment charges in case of late payment of Equated
Monthly Instalments (EMI). An EMI is a fixed amount paid by a borrower to a lender at a
specified date every calendar month. EMIs are used to pay off both interest and principal
every month, so that over a specified period, the loan is fully paid off along with interest. In
cases where the EMI is not paid at the scheduled time, there is a levy of additional / penal
interest on account of delay in payment of EMI.
Doubts have been raised regarding the 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-Central Tax (Rate) dated 28th June 2017 or such penal interest
would be treated as consideration for liquidated damages. In order to ensure uniformity in
the implementation of the provisions of the law, the Board, in exercise of its powers
conferred by section 168 (1) of the CGST Act, hereby issues the following
clarification.
Generally, following two transaction options involving EMI are prevalent in the trade:-
Case – 1: X sells a mobile phone to Y. The cost of mobile phone is Rs 40,000/-. However, X
gives Y an option to pay in installments, Rs 11,000/- every month before 10th day of the
following month, over next four months (Rs 11,000/- *4 = Rs. 44,000). Further, as per the
contract, if there is any delay in payment by Y beyond the scheduled date, Y would be liable
to pay additional / penal interest amounting to Rs. 500/- per month for the delay. In some
instances, X is charging Y Rs. 40,000/- for the mobile and is separately issuing another
invoice for providing the services of extending loans to Y, the consideration for which is the
interest of 2.5% per month and an additional / penal interest amounting to Rs. 500/- per
month for each delay in payment.
Case – 2: X sells a mobile phone to Y. The cost of mobile phone is Rs 40,000/-. Y has the
option to avail a loan at interest of 2.5% per month for purchasing the mobile from M/s ABC
Ltd. The terms of the loan from M/s ABC Ltd. allows Y a period of four months to repay the
loan and an additional / penal interest @ 1.25% per month for any delay in payment.
As per the provisions of sub-clause (d) of sub-section (2) of section 15 of the CGST
Act, the value of supply shall include “interest or late fee or penalty for delayed payment of
any consideration for any supply”. Further “services by way of extending deposits, loans or
advances in so far as the consideration is represented by way of interest or discount (other
than interest involved in credit card services)” is exempted.
Further, as per clause 2 (zk) of the notification No. 12/2017-Central Tax (Rate) dated
the 28th June, 2017, “‘interest’ means interest payable in any manner in respect of any
moneys borrowed or debt incurred (including a deposit, claim or other similar right or
obligation) but does not include any service fee or other charge in respect of the moneys
borrowed or debt incurred or in respect of any credit facility which has not been utilised;”.
Accordingly, based on the above provisions, the applicability of GST in both cases
listed above would be as follows:
Case 1: As per the provisions of sub-clause (d) of sub-section (2) of section 15 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. mobile phone. Accordingly, the penal
interest would be taxable as it would be included in the value of the mobile, irrespective of
the manner of invoicing.
Case 2: The additional / penal interest is charged for a transaction between Y and M/s
ABC Ltd., and the same is getting covered under Sl. No. 27 of notification No. 12/2017-
Central Tax (Rate) dated 28.06.2017. Accordingly, in this case the 'penal interest'
charged thereon on a transaction between Y and M/s ABC Ltd. would not be subject to
GST, as the same would not be covered under notification No. 12/2017-Central Tax
(Rate) dated 28.06.2017. The value of supply of mobile by X to Y would be Rs. 40,000/-
for the purpose of levy of GST.
It is further clarified that the transaction of levy of additional / penal interest does not
fall within the ambit of entry 5(e) of Schedule II of the CGST Act i.e. “agreeing to the
obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”, as this
levy of additional / penal interest satisfies the definition of “interest” as contained in
notification No. 12/2017- Central Tax (Rate) dated 28.06.2017. It is further clarified that any
service fee/charge or any other charges that are levied by M/s ABC Ltd. in respect of the
transaction related to extending deposits, loans or advances does not qualify to be interest
as defined in notification No. 12/2017- Central Tax (Rate) dated 28.06.2017, and
accordingly will not be exempt.
