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.

AI Summary

GST on interest: tax applies when interest functions as a penal or default charge affecting the time of supply.
Routine interest for the use of money is not ordinarily subject to GST because the definition of services excludes money; however, interest or late fees that function as penal or default charges and affect the time of supply are included in the taxable value and may attract GST. Banks may correctly charge GST on bank charges and on interest when it operates as a penalty or completes the time of supply, but not on ordinary loan interest in typical lending transactions.