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This circular clarifies the goods and services tax applicability on additional or penal interest charged for delayed equated monthly instalment payments. For supplier-extended credit where a seller supplies taxable goods and charges penal interest for delayed payments, the penal interest forms part of the supply value and is taxable. For third-party loans where a financial institution extends a loan to the buyer for purchasing goods and charges penal interest for delayed loan repayment, the penal interest is exempt under notification provisions. The levy of additional or penal interest does not constitute a separate taxable supply of services for tolerating an act.
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F. No. CBEC- 20/16/04/2018 – GST Government of India Ministry of Finance Department of Revenue Central Board of Indirect Taxes and Customs GST Policy Wing
New Delhi, Dated the $28^{\text{th}}$ June, 2019
To,
The Principal Chief Commissioners / Chief Commissioners / Principal Commissioners / Commissioners of Central Tax (All)
The Principal Director Generals / Director Generals (All)
Madam/Sir,
Subject: Clarification regarding applicability of GST on additional / penal interest – reg.
Various representations have been received from the trade and industry regarding applicability of GST on delayed payment charges in case of late payment of Equated Monthly Instalments (EMI). An EMI is a fixed amount paid by a borrower to a lender at a specified date every calendar month. EMIs are used to pay off both interest and principal every month, so that over a specified period, the loan is fully paid off along with interest. In cases where the EMI is not paid at the scheduled time, there is a levy of additional / penal interest on account of delay in payment of EMI.
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As per the provisions of 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 notification No. 12/2017- Central Tax (Rate) dated the 28.06.2017 “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)” is exempted. Further, as per clause 2 (zk) of the notification No. 12/2017-Central Tax (Rate) dated the $28^{\text{th}}$ June, 2017, “'interest' means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;”.
Accordingly, based on the above provisions, the applicability of GST in both cases listed in para 3 above would be as follows:
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transaction between X and Y is for supply of taxable goods i.e. mobile phone. Accordingly, the penal interest would be taxable as it would be included in the value of the mobile, irrespective of the manner of invoicing.
It is 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 satisfies the definition of “interest” as contained in notification No. 12/2017- Central Tax (Rate) dated 28.06.2017. It is further clarified that any service fee/charge or any other charges that are levied by M/s ABC Ltd. in respect of the transaction related to extending deposits, loans or advances does not qualify to be interest as defined in notification No. 12/2017- Central Tax (Rate) dated 28.06.2017, and accordingly will not be exempt.
It is requested that suitable trade notices may be issued to publicize the contents of this circular.
Difficulty, if any, in the implementation of this circular may be brought to the notice of the Board immediately. Hindi version follows.
(Upender Gupta)
Principal Commissioner (GST)
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