Interest Paid for delayed payment- GST Leviability

Now a days, the suppliers have adopted a practice to recover interest, penalty or similar charges from the recipient for delayed payment of the consideration in respect to their supplies. For example, Mr. A has supplied the goods to Mr. B and as per the agreement if the payment is not made with in 90 days then Mr. B has to pay late payment charges to Mr. A. Similarly, in case any loan is obtained from the lender and the delayed payment charges are paid by the borrower in case of late payment of EMI. This article covers the GST implications on the recovery of interest from customers on account of delay in making payment for the supplies of goods or services and the GST implications on recovery of penal interest by NBFCs, Banks and other lenders from the borrower on account of default in payments of due installments of loan.

As we know that GST is leviable on the transaction value of goods or services. The provisions relating to transaction value are contained in section 15 of CGST Act 2017. Section 15(1) states that the value of a supply of goods or services or both shall be the transaction value that is the price actually paid or payable for the said supply of goods or services. Further, as per the clause (d) of sub section 2 of section 15 the value of supply shall include the interest or late fee or penalty for delayed payment of any consideration for any supply.

In view of the above, any interest or penalty paid for delayed payment in the supply of goods or service should be included in the value of supply. Similarly, on a perusal of the above mentioned provisions of Section 15(2)(d) a view may be taken that the penal interest recovered by NBFCs and Bank on account of delay in payment of installment, shall also be included in the value of supply i.e. the interest on installments.

However in this respect, it is necessary to refer the serial number 27 of Notification No. 12/2017-CT(R) dated 28.06.2017 which is as follow;

From the above serial number 27, it is clear that the services for providing loan where consideration is represented by of interest or discount is exempted from payment of GST vide Notification No. 12/2017 dated 28.06.2019.

Hence the doubts were arised among the taxpayers that whether the interest charged by NBFCs or Banks from the borrower for delayed payment of EMI or loan can be considered as an exempt supply by virtue of serial number 27 of Notification No.12/2017 CT(R) OR whether such interest can be considered as supply of service i.e., service of tolerating an act of default of the borrower, by virtue of clause (e) of para 5 of schedule II of CGST Act 2017 and GST should levied on such service.

In order to ensure uniformity in the implementation of the provisions of the law, the CBIC vide Circular No. 102/21/2019-GST dated 28.06.2019 has clarified the same issue. In the said circular the following two situations were discussed;
I. The penal interest charged by a supplier, where the supplier has provided a credit facility to the buyer but the buyer has not paid the amount within the credit period.
II. The penal interest collected by a finance company due to delay in payment, where the principal supply is supply of services of extending loan or deposit.

Hence it has been clarified that as per section 15(2)(d) the penal interest charged by the supplier in relation to the supply of goods and services shall be included in the value of goods and services and would be liable to GST. However, in case of penal interest collected by a finance company due to delay in payment, it has been clarified that such additional interest or penal interest charged on the delay in payment of instalment of loan by the borrower would be covered under interest as per serial number 27 of Notification No. 12/2017 CT(R) dated 28.06.2019. Thus the same would be exempt from payment of GST.

Conclusion: Where the supplier has charged penal interest from the customer for delay in payment of consideration for supply of goods and services, then such penal interest would be included in the value of supply of goods and services and shall be liable to GST.  However, in case where the lending facility has been provided by the any finance company or bank, then the amount of interest received in respect of such loan as well as penal interest for delay in payment of instalments of loan would be exempted from payment of GST.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.