The Central Board of Indirect Taxes & Customs (CBIC), via Circular No. 245/02/2025-GST incurred the clarifications for the applicability of GST on penal charges being imposed by the Regulated Entities (REs) given RBI instructions on 18.08.2023 asking such Regulated Entities (REs) to assess penal charges in place of penal interest.
The clarification was grounded on the suggestions of the GST council in its 55th meeting conducted on 21st December 2024, at Jaisalmer, and in exercise of the powers granted u/s 168(1) of the Central Goods and Services Tax Act, 2017.
Concerning the RBI instructions on 18.08.2023 directing these Regulated Entities (REs) to impose the penal charges in place of penal interest.
Representations have been obtained asking for clarification on the GST applicability on penal charges being imposed via the Regulated Entities (REs) given RBI instructions dated 18.08.2023 asking these Regulated Entities (REs) to impose penal charges in place of penal interest.
Via RBI directives of 18.08.2023, Regulated Entities (REs), banks, and non-banking financial corporations (NBFCs) have been mandated to stop using penal interest for loan terms that are not being fulfilled. Under the guidelines, REs are to charge penal costs for loan conditions non-compliance instead of penal interest.
Penal charges are intended to infuse a feeling of credit discipline. Credit cards, trade credits, external commercial borrowings, and structured liabilities are waived from these guidelines, which go into effect dated January 1, 2024. But they are regulated under the product-specific norms.
Certain field formations assume that the penalties levied are a sort of compensation or consideration to put with an act or situation. Likewise, the topics were wrapped in Circular No. 178/10/2022-GST, dated 03.08.2022, where it cited that certain payments along with the liquidated damages for contract breach are not considered when tolerating an act or situation.
Such are just the events in a contract instead they are the sums recovered to deter these behaviors. They are been used to stop non-performance or contract breaches. The parties involved a contract for execution not for violation since it has been elaborated that the core of a contract is its performance instead of its breach.
Penal charges imposed via REs in compliance with the directions of the RBI on 18.08.2023 are significantly like charges towards the violation of terms of the contract and therefore counted within the ambit of the aforesaid clarification.
It was precise by the recommendation of the 55th GST council that as per the RBI directives on 18.08.2023 no GST is due on the levied penalty by the regulated entities for the failure of the borrower to comply with the materials terms and conditions of the loan contract.
