In re Bajaj Finance Limited (AAR GST Maharashtra)
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.
Read AAAR Order– GST Payable on Penal Interest for delay in EMI payment: AAAR
Read AAAR Order on Rectification Application- No GST on additional/Penal interest for delayed Loan EMI payment
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING MAHARASHTRA
The present application has been filed under section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Bajaj Finance Limited, the applicant, seeking an advance ruling in respect of the following questions:-
i) Whether the Penal Interest is to be treated as 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?
ii) If the answer to the above is negative, whether the activity of collecting penal interest by the Applicant would amount to a taxable supply under the GST regime?
At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / MGST Act would be mentioned as being under the “GST Act”.
02. FACTS AND CONTENTION – AS PER THE APPLICANT
The submissions, as reproduced verbatim, could be seen thus-
1. The Applicant is a non-banking financial company and is inter alia engaged in providing various types of loan to the customers such as auto loans, loan against the property, personal loans, consumer durable goods loans, etc. All these loans are interest bearing loans.
2. The Applicant inter alia enters into agreements with borrower/customers for providing loans to them. The loan agreements provide for repayment of the outstanding dues/Equated Monthly Installments (EMI) through cheque/ Electronic Clearing System (ECS) National Automated Clearing House (‘NACH) or any other electronic or clearing mandate. The illustrative copies of loan agreement entered into between the Applicant and the customers are collectively enclosed as Annexure-1.
3. The installment of a loan is computed taking into consideration the amount of loan, duration of the loan and the amount of EMI that would be payable by the customer to the Applicant. EMI paid by the customer is a fixed amount payable at a specified date. EMI are used to pay-off both interest and principal amount.
In case of delay in repayment of EMI by the customers, the Applicant collects penal/default interest (hereinafter referred to as “penal interest‘) as an additional interest for the number of days of delay in terms of the agreements executed by the customers. The penal interest is calculated at a fixed percentage on the overdue loan amounts of the customer. The percentage of penal interest varies from customer to customer, and generally ranges between 2% to 4% per month depending on the product.
4. The illustrative copies of customer account statement reflecting the penal interest collected by the Applicant are collectively enclosed as Annexure-2.
5. The relevant extract of clauses of a sample auto loan agreement in respect of penal interest is reproduced Below for ease of reference:
“1. DEFINITIONS AND ABBREVIATIONS,
r. “Penal Charges” shall mean and include overdue charges on non payment of installment on the due date.
…………
II. TERMS OF THE LOAN:
3. The Borrower agrees and confirms that:
(iv) BFL is entitled to levy penalty as follows on default
(a) for continuing non payment of amount due, a penalty not exceeding 3% per month on amount due calculated on pro-rata basis from due date till actually paid as per clause B of the schedule.
……………Emphasis Supplied
6. The amount of penal interest collected from the customers are accounted by the Applicant in its core accounting platform i.e. SAP under General Ledger Code 60000150.
7. Under the GST (implemented from July 01, 2017), the Applicant is of the view that penal interest collected from the customer is in the nature of additional interest, and therefore, the same is not subjected to GST levy. However, given the ambiguity on taxability of penal interest under the GST law, as an abundant caution, the Applicant is filing the present application for Advance Ruling.
Statement containing the Applicant’s interpretation of law and/or facts, as the case may be, in respect of question(s) on which Advance Ruling is sought
2. Issue(s) requiring Advance Ruling
2.1 Based on the above, the Applicant would like to seek an advance ruling, on the following questions:-
i) Whether the Penal Interest is to be treated as 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?
ii) If the answer to the above is negative, whether the activity of collecting penal interest by the Applicant would amount to a taxable supply under the GST regime?
3. Applicant’s Interpretation
3.1 With respect to the questions framed above, the Applicant has analyzed the relevant legal provisions in the ensuing paras.
A. Penal Interest is an additional interest on the overdue loan installment, and therefore, would be exempt from GST. To further emphasis, penal interest should be treated as a part of interest, and therefore, would be exempt from GST.
A.1 Under the GST regime, the taxable event shall be the supply of goods or services. The scope of the term ‘supply’ is provided under Section 7 of the CGST Act, which includes all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration in the course or furtherance of business and importation of services. It also includes activities specified in Schedule I made or agreed to be made without a consideration.
A.2 Vide Notification No. 12/2017 Central Tax (Rate) dated 28.06.2017, the Central Government, in view of powers conferred by Section 11 of the CGST Act, has notified various intra-state supply of services which are exempt from CGST. The Serial No. 27 of the said Notification, inter alia, grants exemption to the services by way of extending loans, in so far as the consideration is represented by way of interest. The relevant portion of the said Exemption Notification is reproduced herein below:
