Penal charges for delayed EMI payments taxable under GST as per Schedule II

The Authority upheld the decision that penal charges collected for delayed EMI payments are taxable under GST as per Schedule II to the CGST Act. The charges were deemed not exempt under the relevant GST notification as they were considered penalties for tolerating payment delays, falling under taxable supply provisions. The appeal was dismissed, affirming the ruling of the Authority for Advance Ruling.

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Issues Involved:
1. Whether the penal interest is to be treated as interest for the purpose of exemption under relevant GST notifications.
2. Whether the activity of collecting penal interest amounts to a taxable supply under the GST regime.
3. Whether the penal interest is in the nature of penalty or liquidated damages for breach of contract and thus not subject to GST.
4. Whether the penal interest falls under the ambit of clause (e) of Entry 5 of Schedule II to the CGST Act.

Summary of Judgment:

1. Treatment of Penal Interest Under GST Exemption Notifications:
The Appellant argued that penal interest should be considered as additional interest and thus exempt from GST under Sr. No. 27 of Notification No. 12/2017-Central Tax (Rate). The term "interest" in the notification means interest payable in any manner in respect of any moneys borrowed or debt incurred but excludes any service fee or other charges. The Authority concluded that penal charges do not qualify as "interest" as defined in the notification, and therefore, do not qualify for exemption.

2. Penal Interest as Taxable Supply:
The Appellant contended that penal interest is not consideration for any supply but rather a penalty for breach of contract. The Authority noted that the penal charges are for tolerating the delay in payment of EMI by the customers, which falls under Sr. No. 5(e) of Schedule II to the CGST Act, making it a taxable supply. The Authority emphasized that the penal charges are not additional interest but penalty/penal charges.

3. Penal Interest as Penalty or Liquidated Damages:
The Appellant argued that penal interest should be treated as penalty or liquidated damages, which do not amount to consideration for any supply and thus should not be subject to GST. The Authority rejected this argument, stating that the penal charges are for tolerating the delay in payment, which constitutes a supply of service under the GST regime. The Authority highlighted that the penal charges are not merely damages but consideration for the tolerance of an act.

4. Applicability of Clause (e) of Entry 5 of Schedule II to the CGST Act:
The Appellant claimed that clause (e) of Entry 5 of Schedule II applies only when there is an agreement to the obligation to tolerate an act or situation. The Authority disagreed, stating that the penal charges collected for the delay in payment of EMI fall under the scope of tolerating an act or situation as per clause (e) of Entry 5 of Schedule II. The Authority emphasized that the agreement between the Appellant and the borrower includes provisions for penal charges in case of delay, making it a taxable supply.

Conclusion:
The Authority upheld the Advance Ruling's decision, stating that penal charges collected by the Appellant for the delay in payment of EMI are taxable under GST as they fall under Sr. No. 5(e) of Schedule II to the CGST Act. The penal charges are not considered additional interest and do not qualify for exemption under Sr. No. 27 of Notification No. 12/2017-Central Tax (Rate). The appeal was dismissed, and the ruling of the Authority for Advance Ruling was affirmed.

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