Facts: M/s Bajaj Finance Ltd (“the Applicant”), a non-banking financial company are providing various types of loan such as auto loans, loan against the property, personal loans, consumer durable goods loans, etc, to their customers and charge interest on such loans disbursed, for which they enter into agreements with borrower/customers. The agreements provide for repayment of the loan in the form of Equated Monthly Instalments (EMI) vide cheque/Electronic Clearing System (ECS), etc.
The instalment of the loan is computed taking into consideration the amount of loan, duration of the loan and the amount of EMI that would be payable. The EMI paid by the customers is a fixed amount payable at a specified date, which includes both interest and the principal amount. In cases of delay in repayment of such EMI by the customers, the Applicant collects penal/default interest (“penal interest”), in terms of the agreements executed by the customers. The same is calculated at a percentage not exceeding a fixed percentage, on the overdue loan amounts of the customer and it varies from customer to customer.
Under the GST the Applicant is of the view that penal interest collected from the customer is in the nature of additional interest, and therefore, the same is not subjected to GST levy. However, given the ambiguity on taxability of penal interest under the GST law, as an abundant caution, the Applicant is filing the present application for Advance Ruling.
Issue Involved: The Applicant is filing the present application for Advance Ruling on the following matter:-
i) Whether the Penal Interest is to be treated as interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017Central Tax (Rate) dated 28.06.2017, Sr. No. 27 of Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06.2017, and Sr. No. 28 of Notification No. 9/2017Integrated Tax (Rate) dated 28.06.2017?
ii) If the answer to the above is negative, whether the activity of collecting penal interest by the Applicant would amount to a taxable supply under the GST regime?
Applicant Contention of Law: The Applicant has analyzed the relevant legal provisions in the ensuing paras. Penal Interest is an additional interest on the overdue loan instalment, and therefore, would be exempt from GST. To further emphasis, penal interest should be treated as a part of interest, and therefore, would be exempt from GST.
The term interest provided under clause (zk) of para 2 of the above said Exemption Notifications, which reads as under – interest’ means interest payable in any manner in respect of any moneys borrowed or debt incurred. The Penal Interest collected by the Applicant is an additional interest for the delay in payment of loan instalment beyond the due date. However, in case, there is any delay in payment of the installments, the interest for the period of delay is not included in the EMI / installment amount and is therefore charged separately from the customers as penal interest. Therefore, the penal interest shall be given similar treatment as that of the principal interest which is factored in EMI / installment amount, and hence, the same shall also be covered under the definition of interest.
Held: The Hon’ble AAR of Maharashtra vide its Order No. GST-ARA- 22/2018-19/B-85, Mumbai dated August 06, 2018 stated 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, there arises an occasion to levy tax under the GST Act on the impugned transactions. Thus, we find that the consideration if any as received by the applicant would clearly qualify as supply as per Sr. No.5(e) of Schedule II of the CGST Act.
Further 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 of penal charges cannot be said to form a part of interest on “loan”, “deposit” or “advance”. This recovery of penal charges is made in view of toleration of the act of the loanee by the applicant and therefore construes as ‘supply’ as per as per Sr. No.5(e) of Schedule It of the CGST Act and is therefore taxable under the GST Act.
Citation: [2018] 99 taxmann.com 236 (AAR – MAHARASHTRA)