This circular provides clarification on the applicability of GST on additional or penal interest charged for delayed payment of Equated Monthly Instalments (EMIs), in order to resolve doubts raised by trade and industry.

The circular explains that penal interest arises when a borrower fails to pay EMIs on time and such interest may be charged either by the supplier of goods or by a third-party lender. Two common scenarios are examined. Where goods are sold on instalment basis by the supplier and penal interest is charged by the supplier for delay in payment, such penal interest is treated as part of the value of supply under section 15(2)(d) of the CGST Act and is liable to GST along with the original supply of goods.

However, where goods are purchased through a loan provided by a financial institution or lender and penal interest is charged by such lender for delayed repayment, the transaction is treated as a service of extending loans. Since interest on loans is exempt under Sl. No. 27 of Notification No. 12/2017-Central Tax (Rate), such additional or penal interest is not subject to GST. In this case, GST on the goods is payable only on the original transaction value.

The circular further clarifies that penal interest is not to be treated as consideration for tolerating an act under Schedule II, and that any separate service fees or charges levied by lenders, other than interest, would remain taxable.

These clarifications aim to ensure consistent treatment of penal interest under GST.