AAR: Delay Payment Interest on Services Included in GST Supply & Liability Valuation

The interest on the late payment towards the supply of the services will get counted in the value of the supply making it obligated to GST, West Bengal Authority for Advance Ruling (AAR) ruled.

In answer to the application provided via Ganga STP Project Private Limited, a company involved in sewage treatment plant development under the Hybrid Annuity Model (HAM) the ruling arrived.

The petitioner asks for the advance ruling on whether the interest levied on 60% of the capital expenditure (Capex), is liable to get paid over and aforesaid the consideration value, at a rate linked to State Bank of India’s Marginal Cost of Funds Based Lending Rate (SBI MCLR), levy GST.

Within the National Mission for Clean Ganga (NMCG) and Kolkata Metropolitan Development Authority (KMDA) for a water treatment project as a part of the Namami Gange Program, the petitioner has entered. Under the HAM model, 40% of the Capex was to be paid through NMCG at the time of the construction period, while the remaining 60% of the Capex will get paid to the company in 60 equal quarterly instalments over 15 years, including interest linked to SBI MCLR.

The matter brought before the authority revolved around whether the interest amount resulting from delayed GST payments should be regarded as a component of the project’s consideration and subject to GST.

The petitioner, represented by Boudhayan Bhattacharyya and Stuti Bansal, asserted that the interest payments from KMDA were designed to compensate for the losses made because of the late payment of the 60% Capex.

They also argued that this interest component, which was tied to the SBI MCLR, represented the time-related cost associated with the delayed payments. Furthermore, given that the payment was structured as an annuity spread out over an extended period following project completion, it should not be included in the value of supply for GST purposes.

The applicant admitted during the in-person hearing that GST would be computed and decided based on the amount of interest received as payments. The value of taxable supply is covered in Section 15 of the Central Goods and Services Tax (CGST) Act, 2017, which was underlined by the AAR. According to Section 15(2)(d) of the CGST act, “interest or late fee or penalty for delayed payment of any consideration for any supply” is included in the value of the supply.

The authority noted that KMDA had committed to pay interest for a delayed payment against the provision of services under the terms of the contract.

Tanisha Dutta, a CGST member, and Joyjit Banik, an SGST member, came to the decision that the interest component is a part of the consideration value and must be included in the value of supply in accordance with Section 15(2)(d) of the CGST Act. As a result, GST will be applied to any interest payments that the applicant receives.