Post implementation of GST and regular updates and changes coming in the existing Law, there is a lot of hue and cry from the Business and Trade Owners regarding the complexities under GST.
Today, let us deal with the aspect in relation to the interest received from the customers on account of Late Payment as per terms of agreement or contract.
Is Interest received on late payment actually covered under GST?
First, instead of looking for the right away answer, let s have a look at the relevant provisions to understand this concept in depth. It is said that if your roots are strong you can grow bigger - so it is of paramount importance under GST specifically to look at the provisions also, to come to a derived and technically sound conclusion.
Sec 15 states that under such a sale transaction wherein both the parties - seller and buyer are not related persons and price is the sole consideration for the supply than the TRANSACTION Value needs to be adopted.
As per Sec 15 (2) d, Interest or late fees or penalty for delayed payment of any consideration for any supply will be included in the value of supply.
Let's take up an example:
Suppose Mr. A has sold goods worth Rs 1 Lakh to Mr. B said on 15/05/17. Now the term period allowed for the payment was 15days, ie the due date was 01/06/17. The Actual payment was made on 15/08/17, ie. 76 days after the due date. Now as per the agreement of sales, for late payment interest of 15 % pa was chargeable, so the total interest Mr. B needs to pay Mr. A will be (100000*15%*76/365) Rs.3123/-
Question: Now the most frequent asked question is that in the purview of the above provision, is GST applicable to Interest component, and if Yes, How Much.
Solution: Yes, GST on interest will be applicable on the interest portion received after 01/07/17, meaning to say we need to bifurcate interest in 2 parts. (i) Interest to be paid pre GST period - from 01/06/17 to 30/06/17 - Interest will be Rs. 1232/- on which NO GST is Applicable.
(ii) Remaining interest of Rs. 1891, GST will be applicable at the rate charged on Invoice. Mr. B will have to pay GST plus Interest of Rs.1891 accordingly to Mr. A. Yes, Mr. B can take credit of this GST paid to Mr. A as ITC is allowed being not covered under Blocked List of ITC u/sec 17 (5) and it is in course of and furtherance of Business. Moreover, all other conditions for availing ITC should be fulfilled.
Conclusion: So, hereby it is evident that interest if received from customers on account of late payment, then GST is leviable on the same and it needs to be accounted and disclosed in GST Returns accordingly.