Bounce and Penal Charges in GST
The present application has been filed under section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Bajaj Finance Limited, the applicant, seeking an advance ruling in respect of the following question:
Whether the Bounce Charges collected by the Applicant should be treated as a supply under the GST regime?
I) Whether the Penal Interest is to be treated as interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017 Central Tax (Rate) dated 28.06.2017, Sr. No. 27 of Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06.2017, and Sr. No. 28 of Notification No. 9/2017-Integrated Tax (Rate) dated 28.06.2017?
*What is meaning of “Bounce Charge”?
“Bounce Charges” shall mean, dishonor of post-detail cheque! ECS ADM/ entrusted by the borrower/co applicant/co borrower for clearance of EMI (monthly installments) or non-payment of installment on or before respective due date for other modes.
*What is penal charges?
“Penal Charges” shall mean and include overdue charges on non-payment of installment on the due date.
Penal Interest is an additional interest on the overdue loan installment, and therefore, would be exempt from GST. To further emphasis, penal interest should be treated as a part of interest, and therefore, would be exempt from GST.
Penal Interest charged by the Applicant for the breach of contract by the customer, is not covered under the ambit of Deemed Services under clause (e) of Entry 5 of Schedule II to the CGST Act.
In case of dishonour of Cheque/ECS/NACH or any other electronic or clearing mandate by the customers, the applicant collects penal/bounce charges which is in line with the agreed terms and conditions. The bounce charges are generally a fixed amount per default commited by the customer for e.g.Rs.350/- for each dishonour of cheque/ECS for the breach of the terms and conditions of the loan.
Question(s) on Advance Ruling is sought-
Question requiring advance ruling
This advance ruling is sought to ascertain whether the Bounce Charges collected by the Applicant should be treated as a supply under the GSI Regime?
We have gone through the facts of the case, submissions made by the applicant and the documents on record.
The Applicant, a non-banking financial company are providing various types of loan such as auto loans, loan against the property, personal loans, consumer durable goods loans, etc. to their customers and charge interest on such loans disbursed, for which they enter into agreements with borrower/customers. The agreements provide for repayment of the loan in the form of Equated Monthly Installments (EMI) vide cheque/Electronic Clearing System (ESC), etc. The installment of the loan is computed taking into consideration the amount of loan, duration of the loan and the amount of EM! That would be payable. The EMI paid by the customers is a fixed amount payable at a specified date, which includes both interest and the principal amount. In case of dishonour of cheque/ ECS/ NACH or any other electronic or clearing mandate by the customers, the Applicant collects bounce charges, which is in line with the agreed terms and conditions of the agreement. The bounce charges are generally a fixed amount per default committed by the customer, for e.g. Rs.350/- for each dishonour of cheque/ECS.
The Applicant is of the view that such bounce charges collected, are in the nature of penalty/liquidated damages and therefore, the same is not a consideration for supply of service and hence, not be subjected to GST levy.
The EMI paid by the customers is a fixed amount payable at a specified date, which includes both interest and the principal amount. In cases of delay in repayment of such EMI by the customers, the Applicant collects penal/default interest (hereinafter referred to as “penal interest’), in terms of the agreements executed by the customers. The same is calculated at a percentage not exceeding a fixed percentage, on the overdue loan amounts of the customer. The percentage of penal interest varies from customer to customer.
While submitting that the Applicant is of the view that penal interest collected from the customer is in the nature of additional interest, and therefore, the same is not subjected to GST levy, the applicant has reproduced the relevant extract of clauses of a sample auto loan agreement in respect of penal interest.
Based on the above provisions and discussions, the Applicant is convinced that the activity of collecting the Bounce Charges do not amount to supply of services under GST Regime and therefore would not be taxable. In any case, the bounce charges being in the nature of penalty for delayed payment of consideration would be Included in the value of supply of loans and therefore, would be treated at par with interest, hence, the same shall be exempt from GST.
Based on the above provisions and discussions, the Applicant is convinced that the activity of collecting the, penal interest will not be subjected to GST, in as much as the same is in the nature of interest on loans, which is exempt from GST. Further, even if it is assumed that the penal interest collected by the Applicant, is not interest on loans, then, the same being in the nature of liquidated damages/penalty, would not be treated as a consideration for any supply, and therefore, will be outside the levy of GST.
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