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2nd July 2019

CLARIFICATION REGARDING APPLICABILITY OF GST ON ADDITIONAL/PENAL INTEREST

The CBIC has issued a Circular No. 102/21/2019-GST dated 28 June 2019, in which clarification has been made regarding leviability of GST on Additional/Penal Interest in case of late payment of Equated Monthly Instalments (EMI).

Generally, there are two options involving EMI as prevalent in the industry -

1. X purchases a phone of Rs. 40,000/- from Y. Y gave an option to pay the amount in instalments i.e. Rs. 11,000/- for every four months (Rs 11,000 * 4 = Rs. 44,000). The same has to be paid on 10th day of every month and in case of default an additional / penal interest amounting to Rs. 500/- per month will also be payable.
2. X purchases phone of Rs. 40,000/- from Y. For making payment to Y, X took loan from Mr. ABC Ltd. of Rs. 40,000/- at interest of 2.5% per month. The terms of the loan from M/s ABC Ltd. allows X a period of four months to repay the loan and an additional / penal interest @ 1.25% per month for any delay in payment.

Here it is pertinent to mention that as per sub-clause (d) of sub-section (2) of section 15 of the CGST Act, the value of supply shall include "interest or late fee or penalty for delayed payment of any consideration for any supply". Further in terms of Sl. No. 27 of exemption Notification No. 12/2017- Central Tax (Rate) dated the 28 June 2017, "services by way of (a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services)" stands exempt.

Accordingly, the taxability as determined by the aforesaid circular in both scenarios is as follows -

In scenario 1, since the transaction is solely between the X and Y, therefore, in terms of sub-clause (d) of sub-section (2) of section 15 of the CGST Act, the penal interest would be taxable and it would form part of the value of mobile, irrespective of the manner of invoicing.

In scenario 2, The additional / penal interest is charged for a transaction between X and M/s ABC Ltd., and the same is getting covered under Sl. No. 27 of Notification No. 12/2017- Central Tax (Rate) dated 28.06.2017, and therefore would be exempt from GST. The value of supply of mobile by Y to X would be Rs. 40,000/- for the purposes of levy of GST.

It has been further clarified that the transaction of levy of additional / penal interest does not fall within the ambit of entry 5(e) of Schedule II of the CGST Act i.e. "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act", as this levy of additional / penal interest is covered under the definition of "interest".