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Quick Summary GST was wrongly levied on penal charges by banks/NBFCs during AprDec 2024 GST Council clarified: No GST applicable Approx. Rs 1,500 crore collected remains unrefunded Raises issues of liability recognition, unjust enrichment, and disclosures Critical audit area for FY ending
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Banks and NBFCs wrongly levied GST at 18% on penal charges for loan defaults from April to December 2024, collecting an estimated Rs 1,500 crore, which has not been refunded.
The GST Council clarified in its 55th meeting in December 2024 that penal charges for breach of contract do not constitute consideration for a supply and are therefore not liable to GST.
Penal charges arise from a breach of contractual terms and are intended as a deterrent, not as consideration for a supply of goods or services, thus falling outside the scope of GST.
Key issues include recognizing the wrongly collected GST as a liability, provisioning for refunds, potential violation of unjust enrichment principles, and the requirement for adequate disclosures and reporting in financial statements.
Auditors must examine the treatment of GST collected on penal charges, the recognition of liabilities and provisions, and the adequacy of disclosures in financial statements to ensure compliance with accounting and legal requirements.
An estimated Rs 1,500 crore was collected as GST on penal charges by banks and NBFCs during the period of April to December 2024.
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