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

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.