Goods and Services Tax Implications on Delayed Invoice Payments
This article clarifies the Goods and Services Tax (GST) implications on interest charged for overdue invoice payments in India. It delves into whether such interest qualifies as a "supply" under GST law and how its value is determined for tax purposes. The piece also explains that the GST rate and HSN code for interest align with the original supply and examines relevant Advance Authority Ruling decisions, noting exemptions for penal interest by financial institutions.
Identifying taxable supplies is a critical component of Goods and Services Tax (GST) assessment. A common scenario involves suppliers charging interest to customers for overdue payments.
Is Interest on Overdue Invoice Payments Considered a Supply for GST?
Typically, interest on late payments does not inherently meet the criteria to be classified as a supply under GST. This is because such interest primarily represents the time value of money, rather than payment for goods or services. Therefore, determining if interest on delayed invoice payments constitutes a supply subject to GST is essential.
Section 15(2)(d) of the Central Goods and Services Tax (CGST) Act, 2017, specifies that the value of a supply must encompass interest, penalties, and late fees incurred due to delayed payment for any supply of goods or services.
Consequently, the imposition of GST on interest for late invoice payments hinges on satisfying the "test of supply." If the transaction qualifies as a supply, then GST is applicable. This confirms that interest collected from a customer for overdue invoice payments is subject to GST and must be reported in the corresponding GST returns alongside the original supply of goods or services.
How is the Value of Supply Determined for GST on Interest Charges?
Under Sections 15(1) and 15(2) of the CGST Act, 2017, the value of supply refers to the amount paid or due for the supply of goods or services. A comprehensive interpretation of these sections indicates that only the interest, penalties, or late fees specifically charged for delayed payments are incorporated into the value used for GST calculation.
GST Rate and Harmonized System of Nomenclature (HSN) Code for Interest
The Goods and Services Tax rate and the corresponding HSN code applied to interest received for delayed payments should align with those of the original supply. For illustration, consider a scenario where Company X sold a car for Rs. 5,00,000, classified under HSN code 4445 (example) with an 18% tax rate (example). If Company X did not receive timely payment and subsequently charged the buyer 15% interest, then GST would be applicable on the interest amount. In this case, the interest would be Rs. 75,000 (15% of Rs. 5,00,000), and the GST levied would be Rs. 13,500 (18% of Rs. 75,000).
This example demonstrates that interest charged for late payments is integrated into the transaction value and is subject to GST at the same rate as the underlying goods or services. Essentially, the categorization of the interest cannot diverge from that of the primary goods or services.
Advance Rulings on GST Treatment of Interest
The Authority for Advance Ruling (AAR) has issued decisions that have implications for businesses, particularly regarding supply chain disruptions. An AAR ruling (No. GUJ/GAAR/R/01/2021 by AAR Gujarat, in M/S. Enpay Transformer Components India Pvt. Ltd. case) determined that GST is applicable under the reverse-charge mechanism on interest paid by a company to its foreign holding company for overdue invoices on imported goods.
Furthermore, the Maharashtra AAR's ruling concerning Bajaj Finance Limited classified interest recovered from borrowers for delayed installment payments as a service subject to GST.
However, Notification No. 12/2012 CTR dated 28th June 2017 clarifies an exemption: penal interest charged by banks or financial institutions for delayed loan repayments from their borrowers is exempt from GST.