Implication of GST on various charges paid on delayed payments w.r.t Non Taxable/Exempt/Nil rated supplies

There are many supply transactions that are kept out of the ambit of GST be it Real Estate sector or Petroleum sector etc.,. Similarly, Government has exempted many supplies from the liability of GST in the public interest and imposed Nil rate of GST on certain supplies. These supplies are called as Non-GST, Exempt and Nil rated Supplies.

As is in many business transactions, even in the cases of supply of Non Taxable/Exempt/Nil rated supplies, there may be several occasions where there will be a default or delay in payment of consideration by the buyers of the goods or recipients of the services. In these cases, the Suppliers levy interest or late fee or penalty by the buyers/recipients towards compensation for the default or delay.

In these cases, it is relevant to examine whether this constitutes “Supply of Services” in terms of Entry Sl. No.5 (e) of the Schedule II of the GST Act and whether GST is liable to be paid on the interest/late fee/penalty amounts paid by the Customers.

For ready reference of the readers the said Entry Sl. No.5 (e) of the Schedule II of the GST Act is extracted hereunder;

Schedule II

Activities to be treated as supply of goods or supply of services

5. Supply of Services

The following shall be treated as supply of services namely: –

(a)…

(b)…

(c’)….

(d) …

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

There are instances wherein it is proposed to treat the supply of goods or services as one transaction and charge of interest/late fee/penalty as another separate transaction by alleging that the amounts paid as interest/late fee/penalty are in lieu of refraining from taking back the goods or services or tolerating the delay in payment of consideration and thus GST is to be payable on the amounts of interest/late fee/penalty though the main supply is Non GST or Exempted or Nil rated.

In this regard, it may be noted that Section 15 of the GST Act defines the ‘value of taxable supply’ only which includes the transaction value as laid in sub section (1) and interest or late fee or penalty for delayed payment of any consideration as laid in sub section (2) (e) of Section 15. Thus the definition for “value of taxable supply” given under Section 15 is all inclusive one and it doesn’t treat the transaction value as one component and interest/late fee/penalty as another different component.

Similar to the definition given to “value of taxable supply” as all inclusive one, the ‘value of Non taxable/Exempt/Nil rated supply” shall also be taken as all inclusive of transaction value and interest/late fee/penalty, if any. Any attempt to consider the transaction value and interest/late fee/penalty in case of Non taxable/Exempt/Nil rated supplies as two different transactions is incorrect. Thus, the various charges viz., interest or late fee or penalty in case of default or delay in payment of Non taxable/Exempt/Nil rated supplies do not constitute as a separate or independent supply and do not attract the GST liability.

(Content is merely for sharing knowledge.  Author is a Consultant based at Hyderabad and worked as Superintendent of Customs, Central Excise & Service Tax and can be reached at contactgstplanner@gmail.com or 9440551266/8919626387)

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