Is Interest Income really exempt from GST?
Interest is generally part of everyone's life. It can be in anything or for anyone. Well! here we are only focusing on interest as financial term. So, in layman language, Interest is the amount paid by borrower for usage of anyone's money generally termed as Lender. Till the time, lender allows the borrower to use his money, later is under an obligation to pay compensation to former in terms of time value/ opportunity cost of money lent.
So will Interest be payable only when money is borrowed or something else as well like any commodity, machinery, building etc. The answer is No. Consideration payable for usage of anything except money is known as Rent, Royalty or Copy Rights etc. Thus term interest shall be interpreted strictly for usage of money.
Everyone in life, either borrows or lends money at some part of his life. It can also be the living for someone like Banks, Financial Institutions. Yet there are others who do not deal in money lending in routine but occasionally, lends it in case of need like friendly loans from friends or relatives.
As we know, whenever there is money involved in any transaction, tax bees attract automatically. Thus government at times look towards collection of revenue in terms of tax either directly or indirectly or even on both sides. It has also to look towards the adequate liquidity in the economy for proper development of business and entire eco-system.
The direct tax is clear about taxing the interest income except when it is earned on a few incentive options like Provident Funds, PPF specified Govt. schemes etc. But there are doubts relating to its taxability under Two year infant law i.e. Goods and Service Tax (GST).
We see, banks do not ask any GST on interest on loans granted by it. Also it does not even pay any GST on the money deposited with it in Saving, Fixed Deposits etc. But there are instances when bank charges GST on interests. Even when bank offers credit card and charges interest on it, GST adds to that as well.
Then there are festivals and offers where banks, retailers and e-tailers attracts customers through various offers with easy financing options like zero cost EMIs or No-Interest EMIs.
So will GST be payable on interest on those finance schemes? There are lots of When, Where, Why and How on taxability of Interest under GST.
Here we travel through various GST provisions related to chargeability on Interest and answers to all such W/Hs?
What is the meaning of Interest under GST?
Clause (zk) of Clause 2 of above notification no. 12/2017 Central Tax (Rate) dated 28th June 2017 defines 'interest' to mean interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;
OK! But the is another reference in clause 5(e) of Schedule II of CGST Act which describes the supply of service as 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act'. This somewhere resembles the colour of Interest. We will discuss about this terms in coming paras.
Whether Interest Income will be included while computing value of Turnover?
Term Turnover is not defined in the GST Law. As per Cambridge Dictionary, turnover means 'the amount of business that a company does in a period of time'. Thus where lending of money is not the main business, Interest Income should not be termed as part of Turnover.
However, The CGST Act defines the term Aggregate Turnover in section 2(6) as
'aggregate turnover' means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.
Thus Interest Income must be included in the value of Aggregate Turnover for the purpose of GST.
As per Sub clause (d) of sub section (2) of Section 15 of CGST Act, the value of supply shall include 'interest or late fee or penalty for delayed payment of any consideration for any supply'.
Chargeability of Interest
The very nature of exempting the Interest Income from GST through notification is to provide relief so that GST should not be imposed on that. This also means that the Interest Income is Supply under GST Provision and was otherwise taxable. However to providing relief to borrowers, it was exempted from Tax.
As per SL. No. 27 of notification number 12/2017- Central Tax (Rate) dated 28th June 2017, Only following interest is declared as Exempt Supply of Service.
Services by way of -
- extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services);
- inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers.
Thus, there will not be any GST liability on Interest Income in above mentioned scenario.
So when is Interest liable for GST?
1. Finance Companies including Banks, NBFCs
- Interest comprises on regular scheduled EMIs- As per SL. No. 27 of notification number 12/2017- Central Tax (Rate) dated 28th June 2017 and also clarified in circular number 102/21/2019 issued on 28th June 2019, the regular interest charged by loan financing company, NBFC or Banks are in the nature of Interest as defined under Clause 2(zk) of Notification (12/2017). Since it clearly satisfies the definition of Interest, this will not be covered under clause 5(e) of Schedule II of CGST Act i.e. 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' and is thus not chargeable to GST.
- Additional/ penal Interest on delayed payment of EMIs- It shall be taxable under GST and benefit of notification number 12/2017 shall not be available in this case.
2. Self Financing by Seller- In a scenario, where items purchased are not financed by third party but seller on his own provides EMI facility and charges interest. In such case, interest component is not against providing any loans but it is consideration for tolerance of delayed payment. Thus Interest in this situation, regular or additional shall be chargeable to GST.
3. Credit Card Companies- Where credit card holder makes total amount due within free credit period, no additional interest is charged by credit card company and therefore there will be no chargeability of GST in that case. However, there will be instances as below:
- On delayed payments of credit card dues- When interest is charged by credit card company for delay in payment, such interest shall be liable to GST.
- Interest in case of Minimum Amount Due- When the holder enjoys revolving credit which means, out of total credit limit, one makes minimum amount due for the month and his total dues are rolled over to next period. In this case, credit card company charges interest on the amount due and such interest shall be chargeable to GST.
- On Purchase of any item on EMIs- When customer buys any item on EMI or after purchase converts the payment in EMI, interest charged on such EMIs shall be liable to GST.
4. Interest Free EMIs- Often Retailers and E-tailers provide payment option through Interest Free EMIs.
The Reserve Bank of India (RBI) has clarified in its circular dated 17th September 2013 that concept of zero per cent interest is non-existent. The circular clarifies that "In the zero percent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to customer in the form of processing fee. Similarly, some banks load expenses incurred in sourcing the loan (viz DSA commission) in applicable rate of interest (RoI) chargeable on the product. The terms are just a marketing gimmick.
There is another way of luring by Retailers/ E-tailers to allow customers instant discount equivalent to interest chargeable by credit card company during tenure of EMIs. Credit card company continues to charge interest and also the GST on it. In such scenario, though customer bears no cost of interest however, GST on such interest has to be born by him and is additional load to cost of product.
5. Inter corporate Loans - In this case, interest is charged against providing loan/ advance to another company and therefore, it satisfies the conditions of notification No. 12/2017 therefore, such interest shall not be chargeable to GST.
6. Interest on delayed payment charged by supplier- In such case, interest is not chargeable against any advance or loan provided but it is supply of service in terms of clause 5(e) of Schedule II of CGST Act. Therefore, such interest shall be chargeable to GST.
7. Interest on loan given by any Individual- The definition of Supply under GST Act in section 7 requires that supply is made in the course or furtherance of business. Therefore, where an individual is not proving loan to related or unrelated person in the course or furtherance of business, it would not amount to supply and thus not taxable. Where by any means, an individual provides loan in the furtherance of business, still such interest on loan will be covered under the definition of exempt supply as mentioned in notification number 12/2017 and hence will not be liable to GST.
Well! I am still skeptical about any possibility on chargeability of GST on Notional value of Interest where amount lent is given free of interest.
There can be question on chargeability of GST on notional interest cost where
- Interest free credit period is allowed by supplier; or
- Interest free loan is given by one person to another; or
- Interest free security deposit is provided; etc
In terms of definition of supply as per section 7 of CGST Act, consideration is important part for supply except in cases covered by Schedule I. Therefore without consideration, the supply will not be completed.
Section 2(31) of CGST Act defines consideration in relation to the supply of goods or services or both to include-
- any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
- the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government.
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;
The valuation rules on GST also provides that transaction price will be the taxable value where price is the sole consideration of supply. There should be a close nexus between the payment and supply.
Payments received towards Interest Free Security Deposit or Loan will not be treated as consideration till it is actually applied against value of supply, if there is no direct link between the payment and supply of original goods or service.
However, where due to Interest Free security/ Loan, transaction price is affected from normal business practise, nexus can be established for the interest free security and value of supply. In such case, cost of notional interest can be liable to GST.
Where interest free credit period is allowed by supplier in the normal business practise, the value of forbearance is already included in value of supply and thus notional interest for free credit period will not be taxable until price charged for goods/ service is sole consideration of supply.
Hope we have fair idea what is exactly mean to Interest GST and the difference between Exempt Interest and Taxable Interest under GST.