Overdue Interest & Penalty by Banking Institution- GST applicability (An Approach)

Question: 

A Banking Institution charges Overdue interest and/ or  penalty in the case of non -payment of installment on time, Since Interest Income is exempt from GST, hence what would be the treatment of such Overdue interest and/or  penalty on such transactions.


Suggested Answer:


As per the list of GST rates on services the following phrase is used which exempts Interest income from GST "Services by way of— (a) 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)

Which specifically excludes the Interest involved in Credit card services hence those would still be taxable under GST regime.

 Now,

INTEREST INCOME in its true sense would cover time value of money and that is what specifically been excluded / exempted under GST. If we look at the true meaning of OVERDUE interest, it is nothing but an increased rate of normal Interest which a Banking Institution charges in lieu of its time value of money itself which perhaps increased because of arranging funds from other sources which was not planned and this OVERDUE Interest would be linked with the time period during which such delay continues. Hence OVERDUE interest should also be treated as NORMAL Interest for the purpose of deciding taxability under GST which currently attracts by NIL rate.

As far as PENALTY on such delays are concerned, we need to understand the nature of such PENALTY which are being levied lump-sum irrespective of its link with time period during which such delay continues and hence these amounts are not in the nature of INTEREST and should not be covered under INTEREST. Hence PENALTY should be treated as SERVICES and should attract GST accordingly.

There is nothing clearly mentioned about the OVERDUE INTT & PENALTY and hence these inferences have been drawn based on author own interpretation and readers should used their own judgement.

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