GST on Penal Interest : CBIC clarification

Summary

The CBIC has clarified that

• any interest (or late fee or penalty) for delayed payment of any consideration charged by the supplier shall be included in the value of supply for he payment of GST.
• The interest component shall be considered for valuation purpose even if a separate invoice has been issued for extending the credit facility.
• However, if any third party is involved like any bank or any other person, other than the supplier himself, who extends credit facility, due to which transaction between supplier and recipient is executed then in such case the interest paid by the recipient would not be subject to GST as it gets covered by exemption allowed under Notification No. 12/2017- Central Tax (Rate), dated 28-06-2017

Comment

• Interest or late fee or penalty for delayed payment of any consideration for any supply is includible in value – – section 15(2)(d) of CGST Act.
• The term ‘delayed’ obviously means ‘delay beyond agreed terms’. This interpretation can also be justified because the word ‘interest’ has been used with the words ‘late fee’ or ‘penalty’. This is on the principle of ‘Noscitur a sociis’- Meaning of a word should be gathered from its context i.e. by associate words.
• Thus, GST should not be leviable on normal interest payable by recipient as per agreed terms of contract.

GST is payable on penal interest collected on default in payment of EMI

[ Bajaj Finance Ltd. In re (2018) (AAR – Maharashtra) GST/ARA/22/2018-19/B-85 Dated August 6 ,2018]

Note : Now this judgment nullified by Circular No. 102/21/2019-GST Dated 28.06.2019

Time of supply when interest, late fee or penalty for late payment is received

The time of supply to the extent it relates to an addition in the value of supply by way of interest, late fee or penalty for delayed payment of any consideration shall be the date on which the supplier receives such addition in value – section 12(6) of CGST Act.

Thus GST is not payable as soon as as demand of interest, late fee or penalty is issued to recipient.

Refer

Circular No. 102/21/2019-GST Dated 28.06.2019 GST on additional / penal interest- Clarification

GST on Interest on short term loan charged by Del Credere Agent : AAR Ruling

GST not applicable on interest free security deposit : AAR