Re: Bajaj Finance Ltd. (2019, Maharashtra AAAR)
Do penal charges for late EMIs attract GST? Understanding the split views and what they mean for NBFCs.
Quick Summary
Question: Are penal charges for late EMIs liable to GST?
Snapshot: The Maharashtra AAAR examined this in Re: Bajaj Finance Ltd. (2019). Across India, decisions are conflicting. Some forums treat penal charges as a penalty for breach (no GST). Others treat them as part of the overall consideration for lending (GST applicable). A final word from the Supreme Court is pending.
- Competing views: penalty vs consideration.
- Legal position is unsettled; careful compliance is needed.
- Impact spans NBFCs, banks, fintech lenders.
Issues
- Do late-payment penal charges form consideration for a service under GST?
- Are they separate supplies or merely a penalty for breach of contract?
- What weight do contract terms, invoices, and disclosures carry?
Rules
Consideration Test
If a charge is part of the price for lending services, GST can apply. If it is a penalty for breach, GST may not apply.
Contract & Invoicing
How the fee is described and billed (penalty vs service fee) influences tax character.
Conflicting Precedents
Bombay HC and Karnataka HC have taken opposite views on GSTability of penal charges.
Supreme Court
Final clarity is awaited; until then, positions carry litigation risk.
Facts — Timeline
Arguments
Assessee (BFL)
- Charge is a penalty for breach, not payment for a service.
- No additional service is supplied for the penalty.
- Taxing penalties distorts contract remedies.
Department
- Penal charges are part of the overall consideration for lending.
- They compensate the lender and relate to supply of services.
- Hence, GST should apply as part of the value.
Judgment / Current Position
There is no final Supreme Court ruling as of now. Courts and tribunals have reached different conclusions. Some treat penal charges as non-taxable penalties; others treat them as taxable consideration forming part of the lending service.
Until the Supreme Court settles the law, the issue remains open and fact-dependent.
Ratio (Working Rule)
- If a charge is for a service supplied, it leans taxable.
- If it is a penalty for breach with no service rendered, it leans non-taxable.
- Contract wording, invoices, and policy documents are critical.
Why It Matters
Outcome affects how lenders price risk, draft contracts, and report GST. It also influences borrower disclosures and dispute strategy for past and future periods.
Key Takeaways
- Law is unsettled; track the Supreme Court.
- Document penal charges clearly as penalty or consideration.
- Align invoices, system codes, and GST returns with your position.
Mnemonic + 3-Step Hook
Mnemonic: “Penalty ≠ Price”
- Name it: Is it called penalty or service fee?
- Prove it: Any service given for the charge?
- Bill it: How is it invoiced and shown in returns?
IRAC Outline
| Issue | Are NBFC penal charges on late EMIs subject to GST? |
|---|---|
| Rule | GST applies to consideration for a supply. Pure penalties for breach (with no supply) may fall outside GST. |
| Application | Examine contracts, system codes, and invoices: do they show a service for the charge, or only a deterrent penalty? |
| Conclusion | Position is fact-driven and currently unsettled; await Supreme Court for final clarity. |
Glossary
- NBFC
- Non-Banking Financial Company; lends without a banking license.
- Consideration
- Payment for a supply of goods or services under GST.
- Penalty for Breach
- Amount charged for violating contract terms; not necessarily a payment for a service.
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