Rectified ruling: Penal interest on delayed EMI payments exempt from GST

The Appellate Authority for Advance Ruling (AAAR) rectified its previous ruling and held that the penal interest charged by the Appellant for delayed EMI payments is exempt from GST under Serial No. 27 of Notification No. 12/2017-Central Tax (Rate). The AAAR applied the Circular No. CBEC-102/21/2019-GST retrospectively, aligning with the Supreme Court's directive on beneficial circulars. This decision provided relief to the Appellant by confirming the exemption of penal interest from GST.

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Issues Involved:
1. Whether the penal interest charged by the Applicants is in the nature of tolerating an act as per entry 5(e) of Schedule II of the CGST Act, 2017.
2. Whether the penal interest is additional interest exempt under Serial No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
3. Whether the Circular No. CBEC-102/21/2019-GST dated 28.06.2019 has retrospective applicability and impacts the interpretation of the law.

Detailed Analysis:

Issue 1: Nature of Penal Interest
The primary issue was whether the penal interest charged by the Appellant from its customers for delayed EMI payments falls under the category of "tolerating an act" as per entry 5(e) of Schedule II of the CGST Act, 2017. The original ruling by the Appellate Authority for Advance Ruling (AAAR) held that the penal interest was for tolerating the act of delay by customers and thus was taxable under GST.

Issue 2: Exemption under Notification No. 12/2017-Central Tax (Rate)
The Appellant argued that the penal interest should be considered additional interest, which is exempt from GST under Serial No. 27 of Notification No. 12/2017-Central Tax (Rate). The Appellant contended that the penal interest is merely an extension of the interest on loans, which is exempt from GST, and should not be treated as a separate supply of services.

Issue 3: Retrospective Applicability of Circular No. CBEC-102/21/2019-GST
The Appellant submitted that the Circular No. CBEC-102/21/2019-GST, which clarifies that penal interest does not fall under entry 5(e) of Schedule II and is exempt from GST, should be applied retrospectively. The Appellant cited the Supreme Court's decision in Suchitra Components Ltd., which held that beneficial circulars should be applied retrospectively.

Judgment Analysis:

Rectification of Mistake
The AAAR acknowledged that the original ruling was contrary to the interpretation provided in the Circular No. CBEC-102/21/2019-GST. The Circular clarified that additional/penal interest is in the nature of interest and does not fall under entry 5(e) of Schedule II of the CGST Act. The AAAR accepted that this clarification should be applied retrospectively, as it is beneficial to the assessee.

Application of Circular
The AAAR referred to the Supreme Court ruling in Suchitra Components Ltd., which mandates that beneficial circulars be applied retrospectively. The AAAR concluded that the penal interest charged by the Appellant should be exempt from GST as per the Circular and Notification No. 12/2017-Central Tax (Rate).

Final Order
The AAAR rectified its previous order and held that the additional/penal interest recovered by the Appellant from their customers for delayed EMI payments is exempt from GST under Serial No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.

Conclusion
The judgment clarified that penal interest charged by the Appellant is exempt from GST, aligning with the Circular No. CBEC-102/21/2019-GST. The AAAR recognized the mistake in its previous ruling and rectified it, providing relief to the Appellant by confirming the exemption of penal interest from GST.

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