Does every charge paid for delayed payment of any amount form part of the value of supply was the question we encountered while analysing Section 15(2)(d) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’).
Section 15(2)(d) provides that interest or late fee or penalty (‘additional charges’) for delayed payment of any consideration for any supply would be included in the value of the supply. Section 15(2) starts with the sentence ‘the value of supply shall include’. The value of supply as per Section 15(1) is the price actually paid or payable (i.e., consideration) for the supply of goods or services or both. From a combined reading of both sections, it can be understood that only interest/penalty/late fee charged because of delayed payment of consideration form part of the value and not such additional charges for delayed payment of any other amounts which are not the consideration of such supply.
It is pertinent to note that supply of services by way of extending deposits, loans or advances (financial services) in so far as the consideration is represented by way of interest or discount is exempted vide Notification No. 9/2017-Integrated Tax (Rate), dated 28-6-2017.
In the opinion of the authors, Section 15(2)(d) does not cover all scenarios where additional charges are paid. The authors’ attempt to highlight in this article a few such uncovered scenarios.
The first scenario is in respect of ruling given by the Andhra Pradesh Authority for Advance Ruling (‘AAR’) in the case of Ushabala Chits Private Limited (viz., foreman). The AAR has held that the additional charges viz., interest/penalty collected from the subscribers by the foreman for delayed payment of instalment amounts is includible in the value of foreman commission (viz., supply of financial and related services), under Section 15(2)(d) by opining that the instalment amount is not an actionable claim.
As is known, the foreman commission is the consideration/value for the supply of financial and related services provided by foreman [in chit funds] whereas interest/penalty collected from defaulter is for the delay in the payment of instalment amount. It appears to us that the interest/penalty, which is collected on the delayed instalment amount and not on the foreman commission, shall not be included in the transaction value (viz., foreman commission) for the supply of financial and related services.
Another scenario is in respect of ruling given by the Madhya Pradesh AAR in the case of Indo Thai Securities Limited. The AAR has held that the additional charges viz., interest/penalty collected from the customers by the stock broker because of delayed payment of cost of securities and brokerage is includible in the value of supply of stock broking services. It was opined that the additional amount being charged on delay of payment by whatever named called should be includible in the value of supply by virtue of Section 15(2)(d).
However, the brokerage is the only consideration/value for the supply of stock broking services provided to the customer whereas the cost of securities is towards the amounts incurred by the stock broker for purchase of securities on behalf of the customers, which is not a consideration for the supply of stock broking services to the customer. Thus, it appears that what is includible in the value of supply in terms of Section 15(2)(d) is only that portion of interest charged on the delayed payment of brokerage amount and not the interest on delayed payment of cost of securities.
In the above ruling, the Authority has made a reference to the Office Memorandum (‘OM’) dated 05-09-2017 issued by the GST Policy Wing (F.No. 349/40/2017-GST Para 2(iii)) for inclusion of interest in taxable value of supply. In the said OM, it was clarified that if the facility of temporary funding extended to clients forms part of the contract between the broker and client, then interest earned on such an activity shall be included in the value of supply. Further, it was clarified that if the said facility is provided as a loan to client then, interest on such service is not liable to GST as per Notification No. 9/2017-ITR.
Further, Circular No. 102//21/2019-GST, dated 28-06-2019 has clarified regarding applicability of GST on additional/ penal interest. In case of sale of mobile phone (sold for consideration ‘X’) with an option to pay in instalments by charging an additional amount (‘Y’) over and above the sale price of mobile (viz., case 1 in the Circular), it was clarified that additional/ penal interest charged on account of delay in payment of instalment amount (viz., X & Y) is includible in the value of supply of mobile phone.
In the light of the above, the department appears to be of the view that the value of supply of goods/services would include the following:
- Consideration agreed for supply of goods/service (, X).
- In case where funding is arranged by supplier to recipient of above consideration by charging an additional amount (Y) over and above consideration of supply of goods/service, such additional amount (, Y).
- Additional charges (, interest/late fee/penalty) on delayed payment of above amounts (viz., X & Y); and
- Additional charges on delayed payment of amounts other than consideration (‘Z’) but that are paid under contract for supply of such goods/service.
It is pertinent to note that a contract may contain multiple supplies (viz., taxable, exempt or non-supplies) and mere inclusion of such supplies in a single contract does not always amount to one single supply. In such a case, the nature of arrangement under the contract becomes relevant to ascertain whether the supplies agreed under the contract are interdependent (viz., composite or mixed supplies) or individual supplies.
Based on the terms and conditions of contract, it is possible to take a view that the additional amount (viz., Y) charged for extending short term funding of consideration of a supply (viz., case (b) above) is a separate supply of financial service (i.e., extension of loan by charging additional amount as interest on such loan) from supply of goods/service and hence, is not includible in the value of supply of goods/service. Consequently, such additional amount can be said to be exempt from GST vide Notification No. 9/2017-ITR.
As regards additional charges collected on delayed payment of any amount other than consideration/value of supply (viz., Z) under a contract for supply of goods/service (viz., case (d) above), it is possible to say that the same shall not be included in the value of taxable supply of goods/service since it is not charged on delayed payment of consideration of taxable supply as enumerated in Section 15(2) but charged on an amount other than consideration of supply.
As regards case (c) above, it is important to note Australian Ruling GSTR 2000/19 which provides that where an amount (viz., consideration (i.e., X) for a supply) is required to be paid by a specified date, but an additional charge is paid if the primary amount is not paid by the due date, such additional charge is consideration for the supply of an interest in a credit arrangement and, as such, is consideration for a separate supply of financial service and not forms part of value of earlier supply. The true character of the arrangement shall be determined having regard to the terms of the agreement and other relevant circumstances.
Therefore, it is possible to take a view that the interest/late fee/penalty charged for delayed payment of consideration/value of supply is a separate supply of financial services. However, this view would be prone to litigation on account of specific inclusion of such payments under Section 15(2)(d) which provides that the interest/penalty/late fee paid for delayed payment of consideration (viz., X) would form part of the value of the main supply.
From the above advance rulings, OM and Circular, it is apparent that the departmental authorities would try to include any additional charges by whatever name called (viz., interest/penalty/late fee) received by the supplier from the recipient for delayed payment of consideration/any other amounts payable under a contract of supply in the value of taxable supply under such contract, in terms of Section 15(2)(d). Therefore, the above view of AARs need to be tested before the Courts considering the observations made supra. In the opinion of the authors, the additional charges paid on delayed payment of any amount other than consideration shall not be leviable to GST.
Further, the Department may dispute that the penal interest charged for the delayed payment of any amount under a contract shall be treated as a supply of service in terms of Paragraph 5(e) of Schedule II of the CGST Act, 2017 i.e., agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.
In this regard, attention is drawn to the ruling given in case of Bajaj Finance Limited, wherein the Maharashtra Appellate AAR has rectified its earlier order by holding that the penal interest charged by the Applicant from customers for the delayed payment of EMI does not fall within the ambit of Paragraph 5(e) of Schedule II of the CGST Act but would be exempt from GST in terms of Notification No. 9/2017-ITR. The same has been held so by placing reliance on Paragraph 6 of the Circular No. 102//21/2019-GST which have clarified that transaction of levy of additional / penal interest does not fall within the ambit of Paragraph 5(e) of Schedule II of the CGST Act as such levy of additional / penal interest satisfies the definition of ‘interest’ as contained in Notification No. 9/2017-ITR. Thus, it can be argued in such cases also that the penal interest charged for delayed payments shall be exempt from GST.
Though the above referred instances are relating to the specific industries viz., chit fund, financial and stock broking sectors, the explanation and observations made above would equally apply to other sectors as well. The tax payers may relook into the nature of payments under contracts to see if such additional charges fall within or outside Section 15(2)(d).
Thus, another Pandora box is waiting for the tax payers to explore as to whether ‘charges for delayed payments could escape from valuation!’.
[The authors are Joint Director and Senior Associate respectively, in GST Practice at Lakshmikumaran & Sridharan Attorneys, Hyderabad]