Penal Interest Not Exempt from GST

The authority ruled that penal interest is not to be treated as interest for the purpose of exemption under the specified GST notifications. The activity of collecting penal interest by the applicant amounts to a taxable supply under the GST regime, and such amounts received would attract tax liability under GST laws.

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Issues Involved:
1. Whether 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.
2. If the answer to the above is negative, whether the activity of collecting penal interest by the Applicant would amount to a taxable supply under the GST regime.

Issue 1: Treatment of Penal Interest as Interest for Exemption
The applicant argued that penal interest should be treated as additional interest on overdue loan installments and thus be exempt from GST under Sr. No. 27 of the relevant notifications. The applicant contended that penal interest represents the time value of money for delayed payments and should be considered part of the interest on loans, which is exempt from GST. The applicant cited various legal provisions and judicial precedents to support the claim that penal interest is essentially interest and should be treated as such for tax purposes.

Analysis:
The authority examined the definition of 'interest' under the relevant exemption notifications and concluded that penal interest is not covered under this definition. The authority noted that the agreements between the applicant and customers explicitly defined penal charges as overdue charges for non-payment of installments, not as additional interest. The penal charges were calculated at a rate not exceeding a certain percentage, indicating they were penalties rather than interest. The authority also considered that penal charges were collected for tolerating the act of delayed payment, not for providing a loan or advance.

Judgment:
The authority ruled that penal interest is not to be treated as interest for the purpose of exemption under the specified notifications. The answer to the first question was negative.

Issue 2: Taxability of Penal Interest under GST
Given the negative answer to the first question, the authority considered whether the activity of collecting penal interest amounts to a taxable supply under GST. The applicant argued that penal interest should not be treated as consideration for any supply and thus should not be taxable. The applicant claimed that penal interest is either additional interest (and thus exempt) or liquidated damages for breach of contract (and thus not a supply).

Analysis:
The authority referred to Section 7 of the CGST Act, which defines 'supply' and includes activities specified in Schedule II. Clause 5(e) of Schedule II categorizes "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" as a supply of services. The authority concluded that the applicant's collection of penal charges for tolerating delayed payments falls under this clause. The penal charges were deemed a consideration for the applicant's agreement to tolerate the act of default by customers.

Judgment:
The authority ruled that the activity of collecting penal interest by the applicant amounts to a taxable supply under GST. The answer to the second question was affirmative, and such amounts received would attract tax liability under GST laws.

Conclusion:
1. Penal interest is not to be treated as interest for the purpose of exemption under the specified GST notifications.
2. The activity of collecting penal interest by the applicant amounts to a taxable supply under the GST regime and attracts tax liability.

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