Clarification Regarding GST on Penal Interest for delayed payment on EMIs.

GST on Penal Interest of EMIs

CBIC has issued Circular No. 102/2019 to clarify the taxability of Penal Interest on delayed EMIs.

Generally, following two transaction options involving EMI are prevalent in the trade:-

Case – 1: Where the Seller himself extends the benefits of EMI to the buyer: 

Seller ---> EMI ---> Buyer

X sells a mobile phone to Y. The cost of a mobile phone is Rs 40,000/-. However, X gives Y an option to pay in installments, Rs 11,000/- every month before the 10th day of the following month, over next four months (Rs 11,000/- *4 = Rs. 44,000/- ). Further, as per the contract, if there is any delay in payment by Y beyond the scheduled date, Y would be liable to pay additional/penal interest amounting to Rs. 500/- per month for the delay. In some instances, X is charging Y Rs. 40,000/- for the mobile and is separately issuing another invoice for providing the services of extending loans to Y, the consideration for which is the interest of 2.5% per month and an additional/penal interest amounting to Rs. 500/- per month for each delay in payment.

Case – 2: Where the third party (Such as Bajaj Finserve) extends the benefits of EMI to the buyer:

Seller ---> Sale ---> Buyer,  Third Party ---> EMI ---> Buyer

X sells a mobile phone to Y. The cost of a mobile phone is Rs 40,000/-. Y has the option to avail a loan at interest of 2.5% per month for purchasing the mobile from M/s ABC Ltd. The terms of the loan from M/s ABC Ltd. allows Y a period of four months to repay the loan and an additional/penal interest @ 1.25% per month for any delay in payment.

In case 1: Penal Interest will be part of Taxable value for GST.

In case 2: Penal Interest will not be part of Taxable value for GST.

Note: Any Service fees or service charge by the Third Party (Such as Bajaj Finserve) shall not be exempt from GST.