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Determination of taxable supply is one of the most key factors for the GST levy. One such aspect is the recovery of interest by the supplier from the customer for making delayed payments.
Characteristically, interest on late payments doesn’t have the necessary elements to consider it a supply. Furthermore, the interest on delayed payment is merely the time value of money and not a consideration for any goods or services. Given this, it’s crucial to understand if the interest on late payment of invoices can be assessed as a supply for the GST levy.
As per Section 15(2)(d) of the CGST Act, 2017, the value of supply also includes interest, penalty, and late fees for delayed payment of any consideration for the supply of goods or services or both.
The levy of GST on the amount paid as interest on late payment of invoices is based upon the “test of supply”, i.e., one needs to satisfy whether the transaction is a supply, then only there will be a levy question of GST. Hence, it is apparent that interest received from a customer for late payment of an invoice is liable to GST. The same should also be disclosed in the GST Returns when the supply of goods or services for which such interest was charged.
According to Section 15(1) and Section 15(2) of the CGST Act, 2017, the value of supply is the price paid or payable for the supply of goods or services or both. From a combined reading of the above sections, it could be understood that only the interest, penalty or late fee charged due to delayed payment forms part of the value for the levy of GST.
The same rate and HSN code are applicable against the supply of which interest on delayed payment is received. For instance, if X sold a car of Rs.5,00,000 with HSN code 4445 (say) with tax rate 18% (say). X didn’t receive the payment on time and charged the buyer interest at the rate of 15%. Here, the GST will be levied at Rs.75,000 (Rs.5,00,00 X 15%) and GST would be Rs.13,500 (18% of Rs. 75,000).
It is clear from the above example that the interest charged to customers for late payment shall be added to the transaction value. The same will be taxable at the rate at which such goods or services were taxable. In short, the classification of interest cannot be different from the classification of such goods or services.
In what could impact businesses when the pandemic has disrupted supply chains, Authority for Advance Ruling (AAR) has ruled that interest for delayed payment is liable to GST under the reverse-charge mechanism. In the Advance Ruling No. GUJ/GAAR/R/01/2021 by the AAR Gujarat in the case of M/S. Enpay Transformer Components India Pvt. Ltd. has held that GST will be levied on the amount paid by the company to its foreign holding company as interest on late payment of invoices for the goods imported.
To the above, one can also refer to the ruling of Maharashtra AAR in the case of Bajaj Finance Limited. It was held that the interest recovered from a borrower for the delay in payment of instalments would be classified as services and would fall under the purview of GST. And the amount so received would attract tax under GST.
However, it is important to note the clarification provided by notification no. 12/2012 CTR dated 28th June 2017 that in the case of a bank of a finance company the penal interest charged by such institution for the delay in payment of such loan from its borrowers will be exempt from GST.