Penal Interests can be excruciatingly painful. Not only do they increase the burden on the borrower, but they can also trigger a host of secondary financial burdens on an individual/family. But a recent ruling from Advance Ruling Authority (AAR), Maharashtra has ensured that not all the penal interest money goes to the lender. The AAR body observed that penal interest collected by a financial services company are subjected to GST. At least the borrowers can now have respite in the fact that some part of their money will be channelled to public welfare schemes or services.
The AAR Ruling
Bajaj Finance Limited, an Indian financial services company, sought clarification from AAR Maharashtra on whether penal interest collected from customers against defaults/delays in on their EMI payments is liable for GST. Bajaj Finance Limited offers a plethora of financial services ranging from lending to asset/wealth management. The AAR Maharashtra touched down on the following key points before ruling that penal interest on EMI defaults will attract GST.
- Receipt of Penal Charges has been made against tolerating of delayed payments and would be considered as ‘supply’ under the GST Act.
- The Agreement between the loanee and the company takes into account situations arising from default on the part of loanees and is accordingly there is an understanding for monetary considerations.
- The agreement may name the monetary settlement as ‘penal interest’ but nomenclature makes little difference. It is crystal clear that transaction under defaults/delays fails the condition for GST exemptions.
- Penal charges are not “loan”, “deposit” or “advance” under GST Law. Henceforth, the exemption is not admissible.
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The recovery of penal charges is in line with the Sr. No. 5(e) of Schedule I of the CGST Act and loanee abides by it. This makes penal interests taxable under the GST Act.
