Penalties, Late Fees/Penal Interests, Fines levied by RBI not Consideration for Supply, GST not Leviable: AAR [Read Order]

The Maharashtra Authority for Advance Ruling ( AAR ) while addressing an Application filed by the Reserve Bank of India ( RBI ) ruled that Penalties, Late Fees, Penal Interests or Fines levied and collected by RBI from contravening banks, non-banking financial institutions and other such entities cannot be deemed as ‘Supply’ under the Goods and Services Tax ( GST ) regime and are not taxable.

The Application for Advance Ruling was filed by the RBI under Section 97 of the Central Goods and Services Tax Act, 2017. The RBI, being the central bank of the country undertakes multifarious functions including but not limited to being the Monetary Authority, Regulator and Supervisor of the Banking and Financial System, Manager of Foreign Exchange,  Issuer of Currency and Regulator and Supervisor of Payment and Settlement Systems.

Master GST Notice Replies – Drafting 20 Notices, Including Appeals - Register Now

One of the queries sought to be addressed through the present Application was whether Penalties, Late Fees, Penal Interests or Fines levied and collected by RBI for contravention or violation of provisions of law are taxable under GST.

The RBI adduced the reasons for imposition of penalties on agency banks, including but not limited to non-maintenance of Cash Reserve Ratio ( CRR ), and Statutory Liquidity Ratio ( SLR ) among others under the RBI Act, 1934; Penalty for bouncing of Subsidiary General Ledger Account Forms under the Government Securities Act, 2006; Late Submission Fees for delayed regulatory reporting on account of External Commercial Borrowings and Trade Credits availed under the Foreign Exchange Management Act, 1999 ( FEMA ) among others.

The Reserve Bank of India adduced their interpretation of the law before AAR by laying reference to Circular No.178/10/2022-GST ( CBIC Circular ) dated 03.08.2022 which clarifies the non-applicability of GST on penalties imposed for violation of laws and breach of contract.

Master GST Notice Replies – Drafting 20 Notices, Including Appeals - Register Now

The two-member Bench of the Maharashtra Authority for Advance Ruling constituted by Ajaykumar V. Bonde, Joint Commissioner of State Tax and Priya Jadhav, Joint Commissioner of Central Tax concurred with the submissions of RBI and referred to Paragraph 7.4 of the CBIC Circular to state that the penalties imposed for violation of laws cannot be deemed to be consideration charged by a government or a local authority for tolerating violations.

In light of the clarification, AAR ruled that  Penalties, Late Fees, Penal Interests or Fines levied and collected by RBI from contravening banks, non-banking financial institutions for the purpose of maintaining discipline and deterrence in the regulatee banks and other entities for contravention of law are not in the nature of a consideration, hence not being a supply of service and not liable to GST.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates