Nyn (Associate member of Team GSTCornor)
INTRODUCTION
Sometimes there may be special charges imposed by the supplier of goods or service on account of some deviation or special circumstance from the expected terms of contract on the part of the recipient such as delay in payment of consideration for the goods or services received. These special charges may be enabled by the contract though not necessarily attracted at the time of supply of the underlying goods or service or may be agreed later–when the special circumstance occurs. These special charges are listed here as interest, late fee or penalty on account of delay in payment of consideration.
TRANSACTION VALUE OF SPECIAL CHARGES
As per section 15 of The Central Goods and Service Tax Act, 2017, the value of supply of goods or service shall include interest or late fee or penalty for delayed payment of any consideration for any supply.
These interest, late fee or penalty would have also been recovered by the supplier “after” the supply has been made, however that would not be includible in the value of supply at the time of supply but due to the express words of this clause it will be included in the transaction value later. For recovering of these special charges, a debit note may be issued after special circumstances occurs i.e at the delayed payment of any consideration.
TIME OF “SUPPLY” OF SPECIAL CHARGES
As per section 12 & section 13 of The Central Goods and Service Tax 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.
Supply has been understood to hold the key to the incidence of GST, but it is the ‘time of supply’ that dictates the occasion when this incidence will come to rest.
Special charges imposed for delay in payment of consideration will enjoy the facility of time of supply being date of receipt of the charges imposed, that is, cash-basis of payment of GST. In simple way, the time of supply in this case is appointed to be the date of receipt by the supplier.
Analysis
It is also important to understand that due to time of supply being prescribed, whether the imposition of these special charges is itself a supply or not? Please see the following comparative discussion:
| Sr. No. | Special Charges ‘are’ Supply | Special Charges ‘are’ not Supply |
| 1. | Special charges are also supply being agreeing to an act or forbear an act or to tolerate an act (entry 5(e) of sch II) read with sec 2(31) | There is no ‘supply’ in the case of interest, late fee or penalty as these special charges are a consequence of a departure from the agreed terms of contract and not in fulfillment thereof |
| 2. | Interest, late fee or penalty are illustrations only and such special charges by any other name would also be liable to GST but on receipt-basis | By accepting such an expansive interpretation, damages awarded by a Court, LD imposed in a contract, forfeiture of a EMD, etc. can become liable to GST as these are all in some way ‘in the course or furtherance of business’ |
| 3. | Special charges paid is liable to GST whether agreed before or agreed subsequently as satisfaction of the limited non-performance | Other than the three special charges listed, any other charges arising from a transaction is not liable to GST as it is not contemplated in the arrangement of supply all though not imposed in all cases |
| 4. | Delay in payment is a primary deviation that gives rise to special charges but even deviation in time or quantity of supply can entail some other form of special charges, GST on those cannot be avoided as the these listed are only illustrative | Only ‘delay in payment’ gives rise to GST incidence on the special charges. Any other deviation would be a variation of contract to be independently examined if it satisfies definition of ‘supply’ |
| 5. | Special charges are ‘linked’ to an underlying supply (original supply) and therefore all forms of special charges would also be liable to GST | Special charges are ‘linked’ to an original supply as such GST cannot be imposed on special charges without an original supply |
From the above discussion, several necessary conclusions need to be reached, namely:
- Whether the three listed charges are exhaustive or only illustrative?
- Whether delay in payment is the only occasion when this provision is attracted or special charges imposed for any other default linked to the original supply will also attract this provision?
- Whether special charges imposed for any other default (not delay in payment) is liable to GST but not on receipt basis but accrual basis or is special charges for these cases not at all liable to GST?
It appears that the three listed cases are exhaustive not by the three cases listed but the circumstance for their imposition – delay in payment of consideration. So, any form of special charges imposed is liable to GST on receipt basis but only if it is due to delay in payment of consideration.
Special charges imposed due to any other default by the recipient are then to be examined if it is linked to an ‘original supply’ or is it by itself a supply?
- If linked to an original supply, it is also liable to tax but not during enjoying flexibility to pay tax on receipt basis and tax being payable based on the date of debit note.
- If not linked to an original supply, GST would not be applicable if it does not satisfy the requirements of levy.
The issues raised in respect of special charges may be considered as matter of discussion and does not carry a procurement of an opinion on view. Readers are free to connect or these discussions and evaluate each such situation after giving it adequate consideration or thought.
The information cited in this document is mostly based on BGM on GST published by ICAI.
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Disclaimer:
The information cited in this article has been drawn from various provision of The CGST Act, Rules, ICAI publications and other various sources. While every effort has been made to keep, the information cited in this article error free, team GST Cornor does not take the responsibility for any typographical or clerical error which may have crept in while compiling the information provided in this article.
This article includes general information about legal issues and developments in the proposed law of GST in India. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. We disclaim all liability in respect to actions taken or not taken based on any or all the contents of this article to the fullest extent permitted by law. Do not act or refrain from acting upon this information without seeking professional legal counsel.
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