Default in Paying EMI? You may soon have to pay GST of 18% on penal interest.
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.
The applicant ,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. On dishonour of cheques/ ECS, etc. the applicant collects penal/ default interest for the delay committed by the customer. The applicant contended that such interest amount is exempt by virtue of Sr. No. 27 of Notification No. 12/ 2017-Central Tax (Rate), which exempts services by way of extending loans in so far as the consideration is represented by way of interest. Also, the penal interest collected from the customer is in the nature of additional interest on a new loan (i.e. defaulted EMI), and not subject to GST it can not be treated as a payment for toleration of an act of delay in payment by the customer. 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.
AAR's observations The Authority for Advance Ruling (AAR) held that the penal charges/ interest amount to consideration for tolerating an act of delay in payment by the customer and would be subject to GST as in case of default, higher rate is charge and not the same rate so it a receipt of an amount on account of for tolerating the act of customers for delaying on their EMI payments beyond due dates and its not additional interest.
The ruling may create another area of potential dispute and the financial services industry and may lead to representation as it is contrary to the approach adopted historically by the financial services industry
DOWNLOAD GST ARA ORDER-21. BAJAJ FINANCE LTD from below link