Amongst the various changes brought in the GST Law vis-a-vis erstwhile Service Tax Law, one of the change is in regard to treatment of interest on delayed payment of consideration towards supply by the recipient. The treatment of late payment interest under GST Law including the determination of time of supply based on which payment of GST is made, has been discussed in this article.
Interest on delayed payment by recipient was not subject to Service Tax
As per Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006, interest on delayed payment of consideration for the provision of services or sale of property, whether moveable or immoveable , was not included in the value of any taxable service. Thus we can say that any late payment interest charged by the service provider from the service recipient was not subject to service tax.
Interest on delayed payment by recipient is subject to GST
The position under service tax law as discussed above has taken a turn around under GST Law, wherein Section 15(2)(d) of the CGST Act, 2017 mandates that any interest or late fee or penalty for delayed payment of any consideration for any supply will be included in the value of such supply.
Accordingly under GST Law any interest or late fee or penalty charged by the supplier due to delay in payment by the recipient , would be exigible to GST.
Interest is not an independent supply but will be included in value of supply
A question may blink in our mind as to whether the late payment interest which is charged by supplier will be regarded as independent supply in view of the fact that para 5(e) of Schedule II of the CGST Act,2017 mandates that agreeing to the obligation to refrain from an act, or to tolerate an act or a situation , or to do an act will be regarded as supply of service.
However in light of Section 15(2)(d) of the CGST Act,such late payment interest will not be regarded as independent supply but would rather form part of the value of supply on whose delayed payment , such interest has been levied.
Illustration:
X Ltd sold goods of value of Rs 1,00,000/- to Y Ltd. GST rate applicable on such goods is 5%. Suppose there is delay by Y Ltd in making payment for such supply and X Ltd charges Rs 10,000/- as late payment interest. In this case the interest charged will be included in the value of supply of goods and thus would be charged to GST @ 5% only.
If main supply is exempt, interest charged on such supply will also be exempt
As discussed in preceding paras that late payment interest will by included in the value of the supply on whose delayed payment, such interest is charged. Accordingly in case a supply is exempt and there is delay in payment thereof and interest is charged by the supplier, such interest being addition in value of main supply, will also be exempt from GST.
Time of supply of late payment interest
We all know that the liability to pay GST arises when time of supply is determined. The time of supply in hands of the supplier is date of issue of invoice or date of receipt of payment (only for services) whichever is earlier. Thus a supplier is required to deposit GST on supply made upon issue of invoice, even if the payment has not been received. If suppose there is delay in payment and the supplier for creating pressure on the recipient issues invoice for late payment interest, whether GST on such interest will also become payable?.
Considering Section 12(2) and 13(2) of the CGST Act, 2017, GST would have become due on such interest on issue of invoice, however in order to provide relief to the suppliers another sub-section (6) has been carved by legislature on Section 12 (for goods) as well as Section 13 (for services).
As per sub-section (6) of Sec 12 and 13 of the CGST Act, 2017, the time of supply to the extent it relates to an addition in the value of supply by way of interest, late fee or penalty for delayed payment of any consideration shall be the date on which the such supplier receives such addition in value.
Accordingly the supplier is required to pay GST on late payment interest only when it is received.
Illustration
X Ltd provides services to Y Ltd of value of Rs 1,00,000/- plus GST @5% , invoice of which was issued on 15.01.20XX. Payment towards this supply was not made by Y Ltd and on 15.05.20XX, X Ltd issued a debit note for late payment interest of Rs 5,000/- plus GST @ 5%. The payment towards the supply and late payment interest was received on 15.06.20XX.
In above case the time of supply as per Section 13(2) of the CGST Act for Rs 1,00,000/- would be 15.01.20XX i.e. the date of issue of invoice. However in regard to late payment interest of Rs 5,000/- the time of supply would be date of receipt of the amount viz 15.06.20XX as per the provisions of Section 13(6) of the CGST Act,2017.
Suppose in above case late payment interest of only Rs 2500/-is received. In such a case GST will be paid on Rs 2500/- only.
Debit note to be issued for charging late payment interest
As late payment interest is an addition in value of supply, the debit note should be raised by the supplier under Section 34(3) of the CGST Act,2017 for such late payment interest. Further as time of supply of late payment interest is date of receipt of payment a supplier can also issue debit note on receipt of the amount. However even if debit note is issued earlier no tax would be required to be deposited.
If GST amount not paid by recipient
In regard to late payment interest there may be situation wherein the recipient only makes payment of late payment interest and GST amount thereon is not paid.
In such cases the amount received should be treated as inclusive of GST and the tax amount shall be determined as per Rule 35 of the CGST Rules, 2017 by applying the following formulae.
Tax Amount = (Value inclusive of taxes X tax rate of GST in %) / (100 + tax rate of GST in %)
Illustration
Late payment interest of Rs 2500/- inclusive of GST @5% is received. In this case tax amount and value of supply would be determined as under:
Tax amount = (Rs 2500 X 5) / (100+5) = Rs 119/-
The taxable value in this case of late payment interest would be Rs 2381/- (Rs 2500/- minus GST RS 119/-)
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
