Facts Involved: The Bajaj Finance Ltd. ("The applicant")  is a non-banking financial company (NBFC) and is providing various types of loans to the customers  such as auto loans, loans against the property, personal loans, consumer durable goods loans, etc. The loan agreements provide for payment of Equated Monthly Installments (EMI) at a specified date. In case of delay in repayment of EMI, penalty in the form of penal interest is collected from the customers.

Issue Involved: The applicant has sought an advance ruling to determine whether such penal interest collected from customers amounts to taxable supply under GST?

Legal position: Clause 5(e) of the Schedule II of the CGST Act includes the activities to be treated as services and it covers the very activity in the form of expression “to tolerate an act or a situation” and thereby an act of tolerating delay in payment of EMI is brought into ambit of supply by treating it as supply of services.

Held: The Authority for Advance Ruling, Maharashtra held that penal interest charged by applicant amounts to supply of services liable to GST. The applicant filed an appeal before Appellate Authority for Advance Ruling, Maharashtra.     

The Appellate Authority for Advance Ruling, Maharashtra observed that interest received on loans are exempt from GST. As per exemption notification under GST, interest means interest payable in any manner for money borrowed but does not include other charges in respect of money borrowed. The penalty/penal charges recovered by the applicant from the borrowers are covered under ‘other charges’ and not under ‘interest’.      

Further, as per the provisions of the CGST Act, 2017 ‘tolerating an act or a situation’ is a supply of service. Therefore, tolerating delay in payment of EMI would fall within the ambit of supply.     

The Appellate Authority for Advance Ruling, Maharashtra upheld the order of AAR that penalty/penal charges recovered by applicant due to delay in payment of EMI by borrowers are supplies liable to GST.