Applicability of GST on additional/penal interest on delayed payment

Commentary on Circular No. 102/21/2019 – GST dated June 28, 2019 regarding the applicability of GST on additional/penal interest on delayed payment charges in case of late payment of Equated Monthly Instalments (EMI)

Entry 5(e) of Schedule II of the Central Goods and Services Tax Act, 2017

“Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”
It is 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.

Section 15 (2) (d) of CGST Act

The value of supply shall include “interest or late fee or penalty for delayed payment of any consideration for any supply”.

SI. No. 27 of notification No. 12/2017-Central Tax (Rate) Dated 28th June 2017

Services by way of (a) 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

As per clause 2 (zk) of notification No. 12/2017-Central Tax (Rate) dated 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;”

Issue/ Concern for clarification of Notification

Applicability of GST on delayed payment charges in case of late payment of Equated Monthly Installments (EMI)

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, its 11,000/- every month before loth 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.

Applicable provision 15(2)(d) , 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 -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

I delay in payment.

The value of supply of mobile by X to Y would be Rs. 40,000/- for the purpose of levy of GST.

Transaction between Y and M/s ABC Ltd., 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’ would be exempt from tax