In re Punjab State Power Corporation Limited (GST AAR Punjab)
1. Introduction: The recent case of Punjab State Power Corporation Limited (PSPCL) seeking an Advance Ruling from the GST AAR Punjab on the taxability of the prepayment premium charged by Power Finance Corporation Limited (PFC), New Delhi, sheds light on a complex issue in the realm of Goods and Services Tax (GST) under the CGST Act, 2017.
2. Brief Facts of the Case: PSPCL, a Punjab Government undertaking involved in electricity generation, transmission, and distribution, availed a working capital term loan of Rs. 2000 Crore from PFC during the Financial Year 2015-16. Deciding to prepay the loan due to a higher interest rate, PFC raised a demand for a prepayment premium of Rs. 16,85,71,429, inclusive of GST at 18%. PSPCL sought an Advance Ruling to determine whether this prepayment premium is taxable under the CGST Act, 2017.
3. Questions on Which Advance Ruling is Sought: The primary question before the AAR Punjab was: Whether the prepayment premium charged by PFC for the prepayment of loans is taxable under the GST Act, 2017?
4. Eligibility of the Application for Advance Ruling: The application falls under the ambit of Section 97(2) of the CGST Act, 2017, and is eligible for a ruling by the Punjab State Advance Ruling Authority.
5. Submissions by the Applicant: PSPCL presented its case by highlighting the exemption of its primary activity, i.e., transmission and distribution of electricity, under GST. It emphasized that the prepayment premium is an ancillary supply to the principal supply of the loan, which is exempted from GST. The applicant cited a circular from the Department of Revenue, clarifying that prepayment charges, as part of commercial terms agreed upon by the parties, constitute consideration for the supply and are exempt when the principal supply is exempt.
6. Submissions by the Jurisdictional Authority: The ACST, Patiala, representing the department, argued that financial and related services are taxable at an 18% rate of tax, as per relevant notifications.
7. Discussions and Findings: The AAR Punjab analyzed the applicant’s submissions and relevant circulars issued by the Central Board of Indirect Taxes and Customs. The distinction between “additional/penal interest” and “pre-payment penalty” was crucial in determining the taxability.
The Circular No. 102/21/2019-GST clarified that “additional/penal interest” on overdue loans is not subject to GST and is exempt. However, for “pre-payment penalty,” the consideration for the supply is subject to GST if the principal supply is taxable.
8. Ruling: The AAR Punjab ruled that if the prepayment premium includes “additional/penal interest,” it falls under the exempted category and is not subject to GST. If it includes “pre-payment penalty,” it is subject to GST only if the principal supply (extending loans) is taxable. As the principal supply is exempt, the prepayment penalty, if any, is also exempt from GST.
9. Conclusion: This ruling provides clarity on the taxability of prepayment premiums in the context of loans and financial services under GST. It underscores the importance of understanding the nature of charges and their relationship with the principal supply in determining their tax treatment. Businesses engaging in similar transactions should carefully examine the terms and conditions to ascertain the GST implications of such charges.
FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, PUNJAB
2. BRIEF FACTS OF THE CASE: –
(1) M/s Punjab State Power Corporation Limited, PSEB Head Office, The Mall, Patiala, Punjab-147001 (PSPCL) is a Punjab Government undertaking engaged in the generation, transmission and distribution of electricity (GST Registration No.03AAFCP5120Q1ZC) which is exempt under GST Act, vide Notification No. 12/2017-Central Tax (Rate) dated 28 June, 2017 (Tariff heading 9969).
(2) The PSPCL availed a working capital term loan of Rs. 2000 Crore from Power Finance Corporation Limited (“WC” in short) a Financial Institution @)11.40% -11.65% during the Financial Year 2015-16. PSPCI. has now decided to prepay this loan of PF(‘ due to their higher rate of interest. PFC raised the demand of prepayment premium Rs.I6,85,71,429/- inclusive of GST @ 18%.
(3) The PSPCL. had submitted an application for advance ruling in form (1ST ARA-01 dated 01.03.2021 seeking to know Whether the prepayment premium to be charged by I’FC, New Delhi for prepayment or loans is taxable under COST Act, 2017?
2. Proceedings Under Section 98 of COST/POST Act:
In this regard personal hearings were conducted on 18.02.2022 and 05.08.2022 before the Advance Ruling Authority, Punjab. During proceedings on 18.02.2022, Mr. Sanjeev Kumar, Accounts Officer of PSPCL appeared on behalf of the applicant and submitted his written submission on the matter. On 05.08.2022, Mr. Sanjeev Kumar Accounts officer along-with Mr. Punnet Assistant Account Officer appeared and submitted additional documents on the matter i.e. circular no. 178/ 10/2022-GST dated 3rd August, 2022 of Department of Revenue (Tax Research Unit).
3. QUESTION(S) ON WHICH ADVANCE RULING IS SOUGHT:
Whether the prepayment premium to be charged by PFC, New Delhi for prepayment of loans is taxable under GST Act, 2017?
4. ELIGIBILITY OF THE APPLICATION FOR ADVANCE RULING
The Section 97(2) of the Central Goods and Services Tax Act, 2017, read with Section 97(2) of the Punjab Goods and Services Tax Act, 2017, provides for the issues on which advance ruling can be sought.
97(2) The question on which advance ruling is sought under this Act, shall be in respect of-
(a) Classification of any goods or services or both;
(b) Applicability of a notification issued under the provisions of this Act;
(c) Determination of time and value of supply of goods or services or both;
(d) Admissibility of input tax credit of tax paid or deemed to have been paid;
(e) Determination of the liability to pay tax on any goods or services or both;
(f) Whether applicant is required to be registered;
(g) whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.
It is observed that the query of the applicant in para III falls under the ambit of Section 97(2) of the CGST Act,2017, read with Section 97(2) of the PGST Act, 2017. Hence, the application of the applicant is eligible for a ruling by the Punjab State Advance Ruling Authority.
5. SUBMISSIONS BY THE APPLICANT: –
The applicant has made the following submissions at the time of hearing of advance ruling application: –
Formation of PSPCL and its functions
1. Punjab State Electricity Board (PSEB) was a statutory body formed on 01 February 1959 under the Electricity Supply Act, 1948. Subsequently vide Notification No. 1/9/08 EB(PR)196, dated 16 April 2010, Govt. of Punjab unbundled Punjab State Electricity Board (PSEB) into two companies.
a. Punjab State Power Corporation Ltd. (POWERCOM)-[Applicant)
b. Punjab State Transmission Corporation Ltd. (TRANSCO)
2. The Applicant, i.e., M/s Punjab State Power Corporation Limited (‘PSPCL”) is a Punjab Government undertaking engaged in generation, transmission and distribution of electricity. Applicant is registered under Goods and Services Tax (GST”) vide registration number 03AAFCP5120Q1ZC.
Background of transaction for which advance ruling is sought
PSPCL has availed a working capital term loan of Rs. 2000 crore from Power Finance Corporation Limited (PFC) a Financial Institution @11.40% -11.65% during the FY 2015-16. Now PSPCL has decided to prepay this loan of PFC due to their higher rate of interest. PFC has raised the demand of prepayment premium of Rs. 16)85)71,429 inclusive of GST (2i 18%.
3. Extracts of the sanction letter of loan of lender (PFC) dated 29.01.2016 reproduced verbatim as under As per clause no. 5 of terms & conditions of Sanction letter of PFC dated 29.01.2016, PFC will charge prepayment premium in case of prepayment of loan by PSPCL.
“5. PRE-PAYMENT OF LOAN
5.2 The Borrower may prepay the outstanding principal amount of the loan only after obtaining the prior written approval from the Corporation which will be at the sole discretion of the Corporation. The approval for prepayment may be granted subject to such conditions as the Corporation may deem fit including prepayment premium,”
Questions seeking Advance Ruling
Whether the prepayment premium to he charged by PFC, New Delhi for prepayment of loan is taxable under COST Art 2017?
Submission:
Government of India, Ministry of Pittance, Department of Revenue (Tax Research Unit) vide Point no. 7.1.6 of CST Circular No. 178/ 10/2022-GST dated 03.08.2022 (Copy enclosed) has clarified that amounts paid for pre-payment of loan as contemplated by the contract as part of commercial terms agreed to by the parties, constitute consideration for the supply of a facility, namely prepayment of loan. Therefore, such payment, even though may be referred to as fine or penalty, is actually a payment that amounts to consideration for supply, and is subject to GST, in cases where such supply is taxable. Since these supplies are ancillary to the principal supply for which the contract is signed, they shall be eligible to be assessed as the principal supply.
In the present case, it is submitted that principal supply is granting loan by PFC, New Delhi which is exempted vide Serial no. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28 June, 2017 (reproduced below). Accordingly, ancillary supply of pre-payment charges or premium is exempted from GST.
Serial no. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28 June, 2017
