The GST Act came into force on July 1, 2017. The CGST Act, through its sections, notifications, and schedules, clarifies what comes under the preview of GST law and what does not. One needs to closely read the sections and exemptions granted before assessing taxability.
Depending upon their nature and structure, transactions may or may not get covered under GST. The word 'interest' also has different meanings across varied transactions. So, transactions must be analysed on a case-to-case basis to determine the validity of GST on interest income.
For an item to come under GST, it must meet the definition of 'goods'. Section 2(52) of the CGST Act states that goods do not include Money and Security. This indicates that transactions involving receipt and payment of money are not covered under GST. So, there is no question about its taxability here. But one needs to understand that transactions in money are different from interest on money.
Entry number 27 of the CGST exemption list details what gets exempted under the head of Interest Income. It says, "Services by way of extending deposits, loans or advances, where the consideration is in the form of interest or discount..." This covers any service which involves the Time Value of Money. The consideration against the service is in the form of interest or discount.
This would easily cover income via interest on borrowed money and deposits. An illustrative list of interest income that gets covered under the exemptions are:
- Fixed deposits or savings deposits in any bank or financial institution.
- Loan or overdraft facility or cash credit facility provided in return for interest.
- Mortgage loans also get covered in the exemption. But the consideration for such a loan must be in the form of interest, and not any other manner.
- Since debt instruments such as debentures and bonds are like loans, interest thereon will be exempted from GST, following entry number 27.
Types of transactions where GST on interest income can be levied
1. Processing fees and default charges
Processing fees or charges in case of borrowed funds are not covered under the exemption list. If service charges, broker fees, documentation fees, or similar charges are levied on a derivative, futures contract, forward contract, invoice, or cheque discounting, they would be considered as a supply of service and be liable for GST.
Any interest on delayed payment of the borrowed amount, interest on delay in payment of settlement obligations, or margin trading service gets exemption from GST. It is because settlement obligations or margin trading services are transactions, like extending loans or advances, and are exempted under Entry 27.
Interest charged on default of credit card balances is specifically excluded from Entry 27. Hence, it will attract GST. Fees charged for card settlement by the banks is a consideration that is part of a separate transaction between the banks themselves. Hence, it will be liable for GST.
2. Commercial papers
The transactions in commercial paper (CP) and certificate of deposit (CD) are like promissory notes. As a result, they are like money, and hence, GST on interest Income is not levied.
CPs and CDs are instruments for lending or borrowing. Consideration is made as discounts or subscriptions to them. Hence, when income from CPs or CDs is concerned, it is exempted from GST. However, if some service charges, documentation fees, broker charges, or fees of similar nature are charged, they would be considered as supply under GST.
3. Finance lease
A finance lease is borrowing against an asset. The interest represents the Time Value of the money benefit given by the bank in financing the asset. However, in such a lease, the ownership of the asset is with the bank. It is like a ‘purchase the asset and lend it further’ transaction for the bank.
Therefore, the services are not purely like giving loans. The consideration for a financial lease is not purely like interest either. Thus, interest on finance lease transactions will be taxable under GST.
In the case of EMI, the taxability of GST on interest income will depend on the transactional structure. Here is an example to illustrate a possible scenario.
Mr. Ram sells a cell phone to Mr. Shyam. Its sale price is Rs. 50,000. Mr. Ram gives Mr. Shyam an option to pay for it in instalments: Rs. 11,000 monthly before the 10th day of the next month, over the next five months (11000 × 5 = 55000).
The contract between them states that if Mr. Shyam delays payment beyond the scheduled date, he must pay an additional monthly interest of Rs. 500 for the delay.
To sum it up: Mr. Ram charges Rs. 50,000 from Mr. Shyam for the phone. He then issues another invoice separately for providing the services of extending loans to him. The consideration for this is a monthly interest of 2.5% and an added monthly interest of Rs. 500 for every delay in payment.
In this case, the amount of additional interest must be included in the value of supply for GST computation. The transaction between them is for the supply of taxable goods (cell phones). Accordingly, the penal interest would be taxable as it would be included in the value of the phone, irrespective of the manner of invoicing.
Now suppose Mr. Ram again sells a cell phone to Mr. Shyam for Rs. 50,000. Mr. Shyam can choose to take a loan with an interest rate of 2.5% per month from the finance bank for buying the phone. So now, Mr. Ram has entered into two different transactions. The transaction with Mr. Ram will get covered under GST. But the transaction with the bank will be exempt from GST.
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Q. Is the return on equity share covered under Exemption under Entry 27?
Ans. Entry 27 does not cover investment in equity that gives the investor the right to share in profit.
Q. If the interest income is exempt from GST, then will no other tax be levied on it?
Ans. The Income Tax Act, 1961 deals with computing taxable income. It is not certain whether an interest income exempted under GST would also be exempted under the Income Tax Act.
Q. Is the interest income included while calculating the aggregate turnover?
Ans. Yes, the interest income gets included while calculating the aggregate turnover, but not while calculating the taxable turnover.