gst on interest premature repayment of deposits

[Madhavan iyengar]

X ltd is in business of lending money and accepts deposits from public and members for a fixed tenure say 12 months and interest rate will be 10%

IF any customer wants premature repayment before 12 months then has to forgo interest there will be reduction by 1% ie it will be 9%

Issue: will this 1% reduction be liable for gst

[KASTURI SETHI]

Not liable to GST.

[Nandan Khambete]

Maharashtra AAR held that GST is payable on penal interest recovered by lender for delay in repayment of EMI. Accordingly to same logic, in this case since 1% is held back for prepayment of deposit, i think GST will be applicable.

Also, i think Department can hold it as a consideration for agreeing to the obligation to tolerate an act or a situation, which is treated as a supply of service under para 5(e) of Schedule II of the Central Goods and Services Act, 2017 ("CGST Act").

[KASTURI SETHI]

IMO the same analogy is not applicable inasmuch as here 1% reduction of interest can be termed as incentive or we may say it is a form of discount etc. to the consumer Such reduction does not take the shape of penal interest.

I also solicit the views of other experts.

[Ganeshan Kalyani]

Yes, it is in the form of an incentive and not a penalty.

[DR.MARIAPPAN GOVINDARAJAN]

Reduction in interest rate could not be termed as incentive or discount. It is the offer of less benefit in case of earlier getting of the deposit. In my view it amounts to penalty for the depositor and this may attract GST. Other views are solicited.

AI Summary

GST on reduced interest: taxability contested between penal interest characterisation and discount/incentive treatment.
Whether a retained portion of interest on premature repayment of fixed term deposits is taxable under GST depends on its characterisation: if treated as penal interest or consideration for tolerating altered performance it may attract GST as a supply of service; if treated as a discount/incentive reducing the lender's benefit it may not be taxable. Professional opinion in the discussion diverges, with some relying on penal interest authorities to support taxability and others treating the reduction as a non penal contractual discount.