GST payable on Penal Interest for Delayed Loan EMI: AAR [Read Order]

GST - EMI - Taxscan

The Advance Ruling Authority (AAR), Maharashtra has held that the penal interest collected by the Bajaj Finance Limited, an Indian financial services company, from it’s customers for delayed payment of EMI is subject to GST.

The applicant company is engaged in lending, asset management, wealth management etc, has sought for a clarification that whether the activity of collecting penal interest from the customers would be subject to GST.

Before the authority, the applicant contended that the amount of such penal interest is not included in the EMI/ installment amount.

The authority observed that the receipt of penal charges on delayed payment of EMIs would be receipt of amounts for tolerating the act of their customers for having delayed/defaulted on their EMI payments within due dates In view thereof, the same would definitely be a ‘supply’ under the GST Act and therefore, t ere arises an occasion to levy tax under the GST Act on the impugned transactions.

The authority pointed out that there is a clear understanding or agreement between the parties to foresee and tolerate an act or a situation of default on the part of loanees for a monetary consideration which is actually a consideration received by the applicant, though in the agreement they may be giving this consideration, other names such as ‘penal interest’, penal charges, penalty, etc. as thought proper by them, but these different nomenclatures in their Agreement.

“We find that the exemption for financial transactions under GST laws is only in respect of the interest/discount earned or paid for loans, deposits or advances. If the transaction, as in the subject case deviates from the above the same fails the test of being a “loan”, “deposit” or “advance”, or the consideration is not an interest or discount, the exemption is not admissible. In the subject case the amount if penal charges cannot be said to form a part of interest on “loan”, “deposit” or “advance”. It is -covered/imposed only because the loanee has delayed the payment of EMI (which consists of the principal amount and interest amount). This recovery of penal charges is made in view of toleration of the act of the Ioanee by the applicant and therefore construes as ‘supply’ as per as per Sr. No. 5(e) of Schedule I of the CGST Act and is therefore taxable under the GST Act,” the authority said.

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