Easy monthly installment or Equated monthly installment is a fixed amount paid by a borrower to a lender at a specific date in every month during the life of the sum borrowed. The loan is fully paid off along with the interest within the specified period. In case on non-payment or untimely payment the same shall be subject to penal interest or additional interest on the borrowed amount. The penal interest charged as such would be treated as consideration for the liquidated damages (giving rise to different supply under GST covered under entry 5(e) of schedule II of CGST Act, 2017 i.e. “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”

Ordinarily there are three option involving EMI are prevalent in the trade.

Case-1

A sells cement to B. The cost of cement is Rs. 100000/-. However A gives B an option to defer the payment in 4 installments of 27500 (Rs.27500*4=110000). Further in case of delay or untimely payment by B he would be liable to pay additional or penal interest amounting to Rs.2500 per month.

Interest in the hand of A which being part of supply shall be chargeable to tax as per valuation method prescribed by section 15(2) of CGST Act, 2017.

Case-2

A sells cement to B. The cost of cement is Rs. 100000/-. However ABC & Co. gives B an option to get the finance and defer the payment in 4 installments of 27500 (Rs.27500*4=110000). Further in case of delay or untimely payment by B he would be liable to pay additional or penal interest @ 2.5 % month.

As per Notifictaion No. 12/2017- CT(R) dated the 28.06.2017 “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.

Further clause 2 (zk) of the said notification defines Interest as “‘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 utilized;”. However the any service fee/charge or any other charges that are levied by ABC & Co. in respect of the transaction related to extending deposits, loans or advances does not qualify to be interest as defined in notification No. 12/2017- Central Tax (Rate) dated 28.06.2017, and accordingly will not be exempt.

Therefore the interest and additional/Penal interest charged by the ABC & Co. for the supply of financing service provided is not liable to charge GST since the same is exempt from tax net.

[Contradictory view has been given in the ruling in the case of Bajaj Finance limited (NBFC) However ruling may differ on case to case basis] 

Case-3

Similar to the transaction in the case-1 the seller A may issue different invoices for the supply of goods (Cement) and different invoice for the supply of services (Finance) . Interest in the hand of A which being part of supply shall be charge to tax as per valuation method prescribed by section 15(2) of CGST Act, 2017.

Conclusion

Therefor the Financial institute levying the Interest and additional or penal interest would not be liable to tax which is not the case when supplier of goods is charging the same.

Author Bio

Name: Heet Shah
Qualification: CA in Job / Business
Company: SHR & Co.
Location: Mumbai, Maharashtra, IN
Member Since: 22 Dec 2018 | Total Posts: 20
I am a part of the one Mumbai Based CA firm serving from last 50 years to the society . I am engaged especially in the field of Indirect taxation from last 4 years. View Full Profile

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4 Comments

  1. Heetshah says:

    Thanks Anita for the compliment!!!!

    I find both the statements mentioned are in affirmation. However i think i missed to explain the point that additional or penal interest forms part of the interest on principal and Hence it should be treated as part of the same supply and should not be treated as different supply.

    Would like to here from you further !!

  2. RAJ says:

    request to publish article by review the position of gst law on gst exempted -below threshold limit suppliers of goods & services particularly in rural areas from the point of viw of buyer of goods and services who is an inter state or intrastate state gst dealer?

  3. Anita Bhadra says:

    Well explained . However , in case 2 , I find contradiction in two statement

    Interest as defined in notification No. 12/2017- Central Tax (Rate) dated 28.06.2017, and accordingly will NOT BE EXEMPT .
    &
    the interest and additional/Penal interest charged by the ABC & Co. for the supply of financing service provided is not liable to charge GST since the same is EXEMPT from tax net.

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