The GST Authority for Advance Rulings (GST-AAR), Maharashtra,
has held that penal interest paid by a customer for delay in payments
of equated monthly instalments to a finance company is subject to GST.
Experts hold that this ruling, which has recently been made publicly
available, will pinch the pockets
of customers and may also lead to
litigation. While advance rulings are binding only on the applicant and
the tax authorities, they do create precedence in other similar cases.
"This ruling would in most probability be challenged before higher
forums. In the meantime, there could be litigation and an exposure
towards payment of 18% GST, if the ruling is ultimately upheld by the
higher forums as well," says Sunil Gabhawalla, chartered accountant and indirect tax expert.
Bajaj Finance, which applied for this advance ruling, provided various
types of loans to its customers. These ranged from car loans, housing
loans, personal loans and even loans for purchase of consumer durable
goods.
The outstanding dues were payable by the customer through equated
monthly instalments (EMIs), either by cheque or electronic mode. EMIs
were a fixed amount, covering repayment of both the loan taken and
interest due on it. These were payable by the customer on specific
dates.
In case of delay in payment of EMIs, Bajaj Finance collected a penal
interest, as an additional interest, depending on the number of days of
delay. The percentage of penal interest, varied from customer to
customer and the nature of the loan – typically it was calculated at 2%
to 4% per month on the overdue amount.
As interest on the loan amount itself is not subject to GST, the finance
company, in its application contended that the penal interest should
also not be covered by a GST levy.
However, the AAR held that GST exemption is available only in respect
of interest earned or paid for loans, deposits or advances. If the
transaction deviates from this nomenclature, the GST exemption is not
available.
“Penal interest on delayed payment of EMIs is a receipt of an amount
for tolerating the act of delay on part of the customers. It is not in
the nature of additional interest, but is in the nature of a supply
which is subject to GST” the AAR ruled.
Gabhawalla adds: “AAR’s ruling seems to be disconnected from the
factual matrix. The finance company does not in any way tolerate the
delay in payment of EMI by the customer. In fact, the charging of penal
interest itself suggests that the finance company is not keen to
tolerate the delay. In the current scenario of non-performing assets
(NPAs) and accountability, it appears too simplistic a proposition to
classify such cases as toleration of a delay by the customers.”
According to a PwC-India alert, “The AAR ruling has adopted a
position that appears contrary to the approach adopted historically by
the financial services industry.It may create another area of potential
dispute and the financial services industry may need to represent this
issue to the Central Board of Indirect Taxes and Customs.”