GST on Interest component of Loan EMI

[Shivang Sharma]

The definition of Services under CGST Act specifically excludes money but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Banks are charging GST on Processing charges, etc as they are activities in relation to use of money, which is correct. But they are also charging GST on interest component of loan EMI's. The point here is interest charged by Banks is only for the 'use of money' and 'use of money' is not a service as per the definition of Services. The Service only includes 'activities in relation to use of service...'.

Keeping in view the above definition, I want to understand why Banks are charging GST on interest component of EMI's.

[DR.MARIAPPAN GOVINDARAJAN]

Likewise telecom operators are charging GST on late fee which is charged when the payment of the bill is made after the due date. Experts views are solicited.

[rajkumar shukla]

kindly see section 15(2) of cgst. interest or late fee or penalty is includible in the value for cgst.

[KASTURI SETHI]

I support the views of both experts in toto.. It is further added that where interest is related to time of supply, GST is applicable on component of interest. In other words, when supply of goods or services is complete only after charging of interest, interest forms the part of taxable value.In routine, no GST is applicable on interest. It is further clear from the following extract and example :-

GST - Time of Supply in GST - Procedure for

[Ganeshan Kalyani]

I agree with the views of the experts. Also, i agree with the querist. GST is not leviable on the interest component. It is charged on bank charges. If your bank is charging GST then it would be on bank charges. However, it is advisable to get clarity from the bank. Thanks.

[Shivang Sharma]

Many thanks for your reply experts...

I don't accept the view that Banks action is covered by Section 15(2)(d) - Value of Supply shall include interest or late fee or penalty for delayed payment of consideration for any supply.

Point to be noted here is - interest mentioned under section 15(2)(d) is in the nature of penal charge for delay in making payment of consideration.

In my case - GST is charged by Banks on Interest component of EMI (which is a consideration) for "use of money" (personal loan provided by Bank). And 'Use of money" is specifically excluded from definition of Service under CGST Act.

So Banks action is not covered under 15(2)(d) also.

Any more views experts...???

[KASTURI SETHI]

Dear Sharma Ji,

Pl. re-read all replies. Interest on loan is not chargeable to GST in a normal way as already explained in my reply above.. It was also not chargeable to Service Tax earlier i.e. pre-GST-era. GST is levaiable on the amount of interest only if interest is paid on account of default in payment. Your attention is also drawn to Sh.Maraippan Govindarajan's reply wherein he has clearly linked interest to penalty i.e. interest by virtue of default payment. When default occurs time of supply is complete only after payment of interest and in that situation interest forms the part of taxable value. Otherwise not at all.

[Shivang Sharma]

Dear Sethi ji, Thank You for the clarification. My second message was for the post by Mr. Rajkumar Shukla ji.

[Ganeshan Kalyani]

Agreed with Sri Kasturi Sir. Thanks.

AI Summary

Debate on GST applicability to loan interest under CGST Act: Experts say GST applies only to penalty charges. A discussion on a forum addressed whether Goods and Services Tax (GST) should apply to the interest component of loan EMIs. The original query highlighted that the definition of services under the CGST Act excludes the use of money, questioning why banks charge GST on loan interest. Various participants, including experts, responded, generally agreeing that GST should not apply to interest unless it relates to penalties for delayed payments. They emphasized that GST is applicable to bank charges but not on the interest itself, unless it is a penalty for late payments. The discussion sought clarity on the banks' practices.