GST on Cheque Dishonour Charges Collected by Assessee

Whether GST should be charged on `Cheque Dishonour  Charges’  had been issue of advance rulings before the various State  Advance  Ruling Authorities.  Recently this issue came before Hon’ble Appellate Authority for Advance Ruling  of Rajasthan  against the judgement by Ld.  Rajasthan Authority for Advance Rulings(RAAR). Appellants have pleaded before the authorities that since `Cheque Dishonour  Charges’  is nothing  but the compensation for the penal charges paid by them to the bank  and therefore, should not be subjected to  GST as the same is out of the ambit of `Supply’.

In the case of TP  Ajmer  Distribution Ltd. Reported at 2019(23) GSTL 60, the Hon’ble authority  analysed the entire facts.  While discussing the facts and law on this issue, the Honble Authority held that  these charges are covered by the Clause 5(e) of the Schedule-II of the CGST Act, 2017. Schedule II to the Act which has the title – “ Activities to be treated as Supply of Goods or Supply of Services”  is a  deeming provision.  Clause 5(e) of this schedule reads:

(e) agreeing to the obligation  to refrain from an act,  or to tolerate an act  or a situation, or  to do an act;

If any persons tolerates any act or a situation and recovers  a certain amount for such tolerance then it is supply of service.  In the case of `Cheque Dishonour’,  assessee is tolerating the situation of dishonor of cheque  by charging certain amount from customers. Dishonour of cheques i.e. a mode of payment to the assessee by their customers, is an act which results in delay of receipt of repayments to the applicant. This delay is an act done by their customers which is tolerated by the assessee  because inspite of such dishonor,  the applicant proposes to continue the agreement with the defaulting party. Hence this becomes supply in terms of clause 5(e).    Therefore,  `Cheque dishonor Charges’, being a supply of service and not exempted anywhere , appropriate GST i.e. @  18% is chargeable on the value of this supply.

(The author is a  Jaipur based  practicing Chartered Accountant and can be reached on  09829063908, indu123@hotmail.com)