Is interest, late fee or penalty charged by the supplier on delayed payment liable to GST?

This issue is one of the most trending questions which is doing the rounds in various sectors.

It is a usual trade practice where the supplier of the goods provide a credit period (say 60 days or 90 days) after which he charges an interest for delayed payment.

Now the most important question which has come up are :

  1. Whether this Interest charged by the supplier of goods liable to GST?
  2. At what Rate GST should be charged on Interest on delayed payment?
  3. When would the liability to pay GST arise?
  4. How should be this shown in GST returns?

Before answering and illustrating the same, I would like to remind that before the introduction of GST there was no provision under IDT law to tax this interest component , the only thing which was then and now also required is deduction of TDS on Interest Payment.

Answer to Question 1

As per Section 15 of CGST Act, 2017, ‘The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply ‘.

Section 15(2) of CSGT Act,2017 lists out the compulsory inclusions in the value of supply where Section 15(2)(d) mentions – ‘interest or late fee or penalty for delayed payment of any consideration for any supply’.

It can be understood that GST provisions have clearly outlined that such charging of Interest will be a part of value of supply.

Answer to Question 2

The GST rate applicable to the main supply in the Tax Invoice against which interest is being received for delay in payment will be the rate applicable to Interest.

Answer to Question 3

As per Section 12(6) of CGST Act, 2017 relating to Time of Supply of Goods, states ‘The time of supply to the extent it relates to an addition in the value of supply by way of interest, late fee or penalty for delayed payment of any consideration shall be the date on which the supplier receives such addition in value.’

Thus the liability to pay GST arises on the day when the supplier receives such Interest, which can be further simplified that such liability materialises on the day when the recipient of the goods actually makes the payment of interest for delayed payment against such goods/services and not on the day when the interest actually becomes due.

Practical Example .

Mr. A of West Bengal supplies a particular good for value of Rs 20,00,000/- to Mr B in Odisha on 07.01.2018. The terms of the payment are that Mr B should make the payment within 60 days for the supply i.e by 08.03.2018 and if Mr B defaults in payment then interest @12 % p.a would be chargeable for default in payment.

The applicable GST rate on such item is say 18%.

Now suppose Mr B defaults and makes the payment of Rs 20,00,000/- on 07.04.2018, thus he shall be liable to pay the interest for 30 days. Mr A of West Bengal would be charging Mr B of Odisha Interest @12% p.a on Rs 20,00,000/- for a period of 30 days amounting to Rs 19,726.

Now Mr A, should raise a debit note in the month of April 2018 under, sub-section (3) of section 34, to Mr B of Rs 19,726 charging IGST on the same @18% i.e Rs 3550.68/-.  Mr A while filing his returns for the month of April 2018 would show particulars of this debit note in his return and would pay the IGST liability on submission of GSTR 3.

Practical Issue

If we again draw our attention to Section 12(6) of CGST Act, 2017 mentioned above which states “The time of supply to the extent it relates to an addition in the value of supply by way of interest, late fee or penalty for delayed payment of any consideration shall be the date on which the supplier receives such addition in value.”

Suppose Mr B makes the Interest payment for delay of Rs 23,276.68/- (19,726 + 3550.68) on 01.05.2018. Now as per Section 12(6), the supplier’s liability to discharge GST  arises when he actually receives the payment , i.e in the during the month of May 2018 , however he has already discharged his GST liability in the month of April when he has raised the debit note.

Author Bio

Qualification: Student - CA/CS/CMA
Company: Lalwani Ferro Alloys Limited
Location: kolkata, West Bengal, IN
Member Since: 16 Jun 2017 | Total Posts: 2

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11 responses to “GST on Interest, late fee or penalty for delayed payment – What you should know”

  1. S Balamurali says:

    we have sold goods on 01/06/2017
    due date of payment is 30/06/2017
    buyer had made payment by 30/09/2017
    we have issued debit note for interest for the period 01/07/2017-29/09/2017
    what is gst impact

  2. S Balamurali says:

    Suppose we have sold goods druing,pre-gst regime,say 01.06.2017 of Rs.100000/-+ED @18%+ vat@5%
    Due date of payment 30.06.2017
    Rate of interest for delay is 18% p.a.
    buyer has made payment on 31.08.2017
    we have raised debit note for interest for the period 01.07.2017-30.08.2017
    please clarify gst impact on interest

  3. Karan says:

    What is the difference between “Late Fee” and “Penaly” in GST?

  4. JAYPRATAP PRODUCTS says:

    IF THE INTEREST AMOUNT OF DELAYED PAYMENT IS LESS THAN RS. 5000/= WHAT RATE OF GST WILL BE CHARGED

  5. Pradeep bhargava says:

    Will the situation change when interest clause is silent and debit note is raised for rectifying the mistake of less charged earlier . In that situation would this be subject to interest on the addition in the basic value. As supply made in the previous month is being referred and recovery is being made.

  6. Nikita Maloo says:

    TDS will not be deducted on such Interest due to delayed payments.

  7. LokeshKR says:

    What Will be the GST rate If the Invoice Consists of 2 different types of GST Rates???

    5% sales 25,000
    18% sales 10,000

    Then What rate should be taken??

    • Vipul Singhal says:

      Rate in respect of goods. For example, Co. send the Good A for Rs. 10000 on which GST charged is 5% and Good B for Rs. 10000 on which GST Charged is 18%. Interest Amount is Rs. 1000. In this case, GST will be Rs. 115. GST on Rs. 500 @ 5% and GST on Rs. 500 @ 18%

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