Department  has received so many representations from the trade and industry

regarding the applicability of GST on delayed payment charge in case of late

payment of Equated  Monthly  Installment(EMI). Doubts were there on whether additional/ penal interest on the overdue loan would be exempt  from  GST on penal interest would be treated as consideration for liquidated damages.

  In order to provide uniformity  in the provision of the law , Board has issued following clarification:-Board says that, Generally the following two transaction options involving EMI are prevalent in  trade.

Case no.1-  X sells a mobile phone to Y. The cost of mobile phone is Rs 40,000/-. However,  X  gives Y an option to pay in installments, Rs 11,000/- every month before 10th day of the following month, over next  four months. Further, as per the contract, if there is any delay in  payment by Y beyond the scheduled date Y would be liable to pay additional / penal interest amounting to Rs. 500/- per month for the delay.In some instances, X is charging Y Rs. 40,000/- for the mobile and is separately issuing another invoice for providing the services of extending loans to Y, the consideration for which is the interest of 2.5% per  month and an additional / penal interest amounting to Rs. 500/- per month for each delay in payment.

Case No.2-     X sells a mobile phone to Y. The cost of mobile phone is Rs 40,000/-.Y has the

                          option to avail a loan at interest of 2.5% per month for purchasing the mobile

                          from M/s ABC Ltd. The terms of the loan from M/s ABC Ltd. allows Y a period

                          of four months to repay the loan and an additional / penal interest @ 1.25%

                           per month for any delay in payment.

The provision of sub clause (d) of sub-section (2) of section 15 of the CGST Act says that 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.

 The conclusion has been given as per case 1. and  case 2. as given above.

   Case 1.- As per the provisions of sub-clause (d) of sub-section (2) of section 15 of the CGST Act,

                The amount of penal interest is to be included in the value of supply. 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 manner of invoicing.

Case 2.- The additional / penal interest is charged for a transaction between Y and M/s ABC Ltd., and

                 the same is getting covered under Sl. No. 27 of notification No. 12/2017- Central Tax (Rate)

                  Accordingly, the 'penal interest' charged thereon on a transaction between Y and M/s ABC Ltd.       

                   would not be subject to GST. The value of supply of mobile by X to Y would be Rs. 40,000/- for

                   the purpose of levy of GST.

It is 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, As this levy of additional / penal interest satisfies the

       definition of “interest” as contained in notification No. 12/2017- Central Tax (Rated). 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), and accordingly will not be exempt.