When a supplier charges interest on delayed payment from a customer, a common question is whether this interest is subject to GST and whether it is included in the value of the original supply. The answer is yes, subject to specific rules.
Section 15(2)(d) of the CGST Act
Section 15(2)(d) states that the value of supply shall include interest or late fee or penalty for delayed payment of any consideration for any supply.
This means if a supplier charges interest because the customer paid the invoice late, that interest is added to the transaction value of the supply and taxed at the same rate as the underlying supply.
Example
A supplier sells goods for Rs 1,00,000 with 18% GST. The customer pays 30 days late. The supplier charges Rs 2,000 as interest for the delay.
- The interest of Rs 2,000 is included in the transaction value of the goods supply.
- Total taxable value = Rs 1,02,000.
- GST at 18% = Rs 18,360, which includes GST on the interest.
Thus, the supplier must charge GST on the interest amount as part of the original supply.
Separate Supply of Interest on Loan
The rule under Section 15(2)(d) applies only to interest charged for delayed payment of consideration for a supply. It does not apply to interest charged by a lender on a loan or financial accommodation, because that is a separate supply of financial service.
Interest on loans, advances, deposits, credit cards, etc., is a financial service under GST. Interest income from lending is generally exempt under Notification No. 12/2017, except certain categories. Therefore, a bank or NBFC charging interest on a loan does not include it in the value of any goods supply; it is a separate exempt or taxable financial service.
Time of Supply for Interest
The interest for late payment is charged after the original supply. The time of supply for the interest component follows the time of supply of the original supply, or it may be treated as a debit note/credit note situation.
Practically, if the supplier charges interest after the invoice, the supplier issues a debit note for the interest amount. The debit note increases the taxable value and tax liability. The time of supply for the debit note is the date of issue of the debit note, and the supplier must report it in the return for that period.
Input Tax Credit for Recipient
If the recipient is eligible for ITC on the original supply, the recipient can also claim ITC on the additional tax charged via debit note for the interest. The recipient must reconcile with GSTR-2B.
Practical Compliance
- When charging interest for late payment, issue a debit note referencing the original invoice.
- Include the interest amount in the taxable value and calculate GST at the same rate as the original supply.
- Report the debit note in GSTR-1 and pay tax in GSTR-3B.
- Maintain documentation of the late payment and interest calculation.
Common Mistakes
- Not charging GST on late payment interest.
- Charging GST on interest at a different rate (e.g., 18% instead of the goods rate).
- Treating interest as a separate financial service when it is linked to supply.
- Not issuing a debit note and adjusting GSTR-1.
How Anuj Desai & Associates Can Help
We help suppliers charge and report interest on late payments correctly, issue debit notes, and manage GST compliance.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
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