GST Exemption on Additional/ Penal interest on delayed payment of monthly loan instalments – AAAR Maharashtra
by ReinHeads Team | Oct 19, 2020
AAAR Maharashtra* – GST Exemption on Additional/ Penal interest on delayed payment of monthly loan instalments
| Facts |
- Bajaj Finance Limited (‘the Appellant’) is a non-banking financial company and is engaged in providing loans to customers
- The Appellant enters into agreements with borrowers for providing loans, which has the following key terms:
- Borrowers to repay the outstanding dues by way of Equated Monthly Instalments (EMI) through specific mode of payment;
- EMI is computed on basis the amount of loan, rate of interest, duration for a loan, etc;
- Additional/ penal interest to be collected by the Appellant at fixed percentage from the borrowers on delayed payment of EMI
- The Appellant filed an appeal before Maharashtra Appellate Authority for Advance Ruling (‘the AAAR’) contending that the amount charged as penal interest by way of additional interest from the borrowers is exempted vide under Serial No. 27 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 (‘the Notification’)
- The AAAR rejected the appeal and held that the consideration received by the Appellant is for tolerating the act of the borrowers and would be covered by Entry 5(e) of Schedule II of the Central Goods and Service Tax Act, 2017 (‘the CGST Act’) vide order dated 14.03.2019 (‘the Impugned AAAR Order’)
- Aggrieved by the Impugned AAAR Order, the Appellant filed an application under Section 102 of CGST Act for rectification of mistake apparent from the face of the record in the light of the Circular No. CBEC-102/21/2019-GST dated 28.06.2019 (‘the Circular’)
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| Issues before the AAAR |
- Whether the additional/ penal interest would be subject to GST under Entry 5(e) of Schedule II of the CGST Act, 2017 or would be exempt from GST under the category of ‘interest’ specified in the Notification?
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| Discussion and Findings of the AAAR |
The AAAR rectified the Impugned AAAR Order and opined the following key points:
- The Circular has clarified that Entry 5(e) of Schedule II of the CGST Act is not applicable in the cases of additional/ penal interest, since the same would be covered under the ambit of ‘interest’ as contained under the Notification No. 12/2017- Central Tax (Rate) dated 28.06.2017
- The Circular is clarificatory and beneficial in nature and accordingly the Circular has to be applied retrospectively in view of the decision of the Hon’ble Supreme Court in the case of Suchitra Components Ltd. v CCE
- Impugned AAAR Order is contrary to the interpretation of the legal provision as envisaged under the GST Law and the Circular
- Additional/ penal interest recovered by the Appellant from its customers against the delayed payment of monthly instalments of the loan, would be exempt from the levy of GST in terms of the Serial No. 27 of the Notification
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* Appellate Advance Ruling No. MAH/AAAR/SS-RJ/24A/2018-19 dated 12 December, 2019 (The Appellate Authority for Advance Ruling, Maharashtra)
