GST on Late Payment Charges/Interest from Buyers: Applicability & Tax Rates

Introduction: In property transactions, recovering interest or penalty for delayed payments is a common practice. This article delves into the Goods and Services Tax (GST) implications of such charges in the context of property sales. Understanding the relevant provisions, including Section 15 of the CGST Act and Circular No. 178, is crucial for accurate compliance.

Recovery of Penalty/Interest on delayed payment

As per general practice, companies enters into agreement with the customer for providing of goods and services as per agreed terms and conditions. In some agreements, interest and charges to be recovered in case of delay payment of amount is also mentioned for timely recovery of payment from the customer.

In given case, the Company has sold a piece of land and also a developed plot to a customer which is covered under a valid contract between both the parties.

Relevant provisions to understand the above mentioned points :-

1. Valuation of Supply – Section 15 of CGST ACT,2017

(1) 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.

(2) The value of supply shall include-

(a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier; (b) …….. ;

(b) ……… ;

(c) interest or late fee or penalty for delayed payment of any consideration for any supply; and

(d) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

2. Circular No. Circular No. 178/10/2022-GST

Para no. 9 of the circular deals with the issue of Late Payment Surcharge or Fee in various transactions. Relevant extract of the circular is reproduced below :-

The facility of accepting late payments with interest or late payment fee, fine or penalty is a facility granted by supplier naturally bundled with the main supply. It is not uncommon or unnatural for customers to sometimes miss the last date of payment of electricity, water, telecommunication services etc. Almost all service providers across the world provide the facility of accepting late payments with late fine or penalty.

Even if this service is described as a service of tolerating the act of late payment, it is an ancillary supply naturally bundled and supplied in conjunction with the principal supply, and therefore should be assessed as the principal supply.

Since it is ancillary to and naturally bundled with the principal supply such as of electricity, water, telecommunication, cooking gas, insurance etc. it should be assessed at the same rate as the principal supply.

However, the same cannot be said of cheque dishonor fine or penalty as discussed in the preceding paragraphs.

Analysis basis the above mentioned provisions and circular

• In given case, there are two separate supplies one consisting of sale of land which is an exempt supply and other is on sale of developed plot which is assumed to be taxable supply as per the provisions of the Act.
• As per Section 15 of the CGST Act, which clearly says that value of supply of goods and services specifically includes interest or late fee or penalty for delayed payment of any consideration for any supply, GST on interest recovered needs to be discharged in our given case.
• Further, as per Circular 178 which deals with the liquidated damages and late payment charges recovered from the buyer, it is clearly evident that late payment charges and interest on delay payment is chargeable to GST as per the principal supply of the agreement.
• It is to be noted that circular states that the late payment charged are not to be equated with the liquidated damages wherein there is no supply from the buyer to the supplier and same is not chargeable to GST as supply element is missing. Relevant extract of the circular is reproduced below : –

“a reasonable view that can be taken with regard to taxability of liquidated damages is that where the amount paid as ‘liquidated damages’ is an amount paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract and there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the liquidated damages, in such cases liquidated damages are mere a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute consideration for a supply and are not taxable.”

• Accordingly, interest shall be subject to the same rate of GST as leviable on principal services, i.e., supply of property and to be charged in following manner : –

Conclusion:-

Whether the interest/penalty recovered from the buyer of the property would be liable to GST ?

Yes, the same is chargeable with respect to principal supply of the agreement.

What would be the tax rate applicable on interest and penalty recovered?

Tax rate would depend on the principal supply as the same is included in the value of principal supply. Tax rate charged on principal supply would applicable on the same.

At what time GST would be chargeable on the interest recovered?

As per Section 12(6) of the CGST ACT 2017,

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.

Accordingly, the same would be taxable on receipt of the amount and not on accrual basis.

Conclusion:

Interest or penalty recovered from property buyers is subject to GST, aligning with the tax rate applicable to the principal supply. Understanding the provisions of Section 15 and Circular No. 178 is essential for accurate compliance. Additionally, GST on interest is chargeable on the date of receiving the additional value, providing clarity on the time of supply.

Disclaimer: The views presented in this article are personal and readers are advised to consult with professionals before taking any action.