GST on additional/ penal interest under EMI schemes

GST on additional/ penal interest under EMI schemes
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CBIC clarifies on the applicability of GST on additional/ penal interest under EMI schemes

An Equated Monthly Instalment (‘EMI’) is a fixed amount paid by the borrower to the lender on a specified date every month. The EMI includes month principal and interest components, which aggregate to an equal amount of outflow every month.  Over a specified period, the loan is fully paid off along with interest. In cases the EMI payment schedule is not complied, there could be levy of additional interest/ penal interest to compensate for the delay. 

Clarifications were sought if GST was also applicable on additional/ penal interest charged for delay in EMI payments.

Vide Circular No. 102/21/2019-GST dated 28 June 2019, the CBIC has clarified

The summary of the Circular is given below:

1. The additional/ penal interest would be charged by the financier for any delay in payment of the EMI on the scheduled date.  Questions were raised before the CBIC on the treatment of the same under GST law:

  • Exempt under GST by considering the same as interest on loans or advances (as per Serial No. 27 of Notification No. 12/2017 – Central Tax (Rate) dated 28 June 2017)
  • Taxable under GST by considering the same as consideration for liquidated damages (as per Entry 5(e) of Schedule II of the Central Goods and Services Tax Act, 2017).

2. The CBIC has provided two examples to explain the position:

1. Scenario 1 – Seller offers finance facility to the buyer for purchase

  1. Seller gives an option to the buyer at the time of sale to make payment in instalments.
  2. Contract has a clause for payment of additional/ penal interest for delays in payment.
  3. In some instances, the supplier would issue separate invoice for mobile and separate invoice for extending loan services i.e., for the interest and additional/ penal interest.

Clarification by CBIC:

  • As pert Section 15(2)(d) of the CGST Act, any amount in the nature of interest/ late fee/ penalty for delayed payment amounts to consideration towards supply of goods.
  • Hence, the amount of penal interest has to be included in the value of supply and would be subject to GST as applicable to the principal transaction.
  • The manner of invoicing would not change the GST implication.

2. Scenario 2: Third Party offers finance facility to the buyer for purchase

  • The seller undertakes sale of product to the buyer.
  • The buyer has an option to avail finance facility from a Third Party.
  • Contract has a clause for payment of additional/ penal interest for delays in payment.

Clarification by CBIC:

  • The transaction is undertaken between the buyer and third party financier.
  • Penal/ additional interest charged would not form part of the consideration for goods.
  • The transaction between the buyer and Third Party financier would be covered under Serial No. 27 of Notification No. 12/2017 – Central Tax (Rate) dated 28 June 2017) – “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)”.  Hence, the same would be exempt from GST.
  • Further, the same would not fall under the ambit of Entry 5(e) of Schedule II of the CGST Act – “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”.
  • However, if any service fee/ service charges/ any other charges are collected from the customer, then the same would not qualify to be considered as ‘interest’ and hence be subject to GST

The Circular reaffirms the existing position of GST law and provides guidance to businesses in order to assess the impact of GST on additional/penal interest collected from customers.  Businesses should be cognizant of the above implications in case of structuring transactions with financing arrangements.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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GST on additional/ penal interest under EMI schemes

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