Central Board of Indirect Taxes and Customs (CBIC) has issued Circular No. 102/21/2019 dated 28th June, 2019 to clarify the applicability of GST on delayed payment charges in case of late payment of Equated Monthly Instalments (EMI). EMI is a fixed amount (interest and principal) required to be paid by the borrower to the lender at a specified date every calendar month.
CBIC has clarified that the transaction of levy of additional / penal interest does not fall within the ambit of entry 5(e) of Schedule II of the CGST Act i.e. “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or or to do an act”, as this levy of additional / penal interest satisfies the definition of “interest” as contained in notification No. 12/2017- Central Tax (Rate) dated 28.06.2017and hence are exempt from levy of GST. However, it is further clarified that any service fee/charge or any other charges that are levied in respect of the transaction related to extending deposits, loans or advances does not qualify to be interest as defined in notification No. 12/2017- Central Tax (Rate) dated 28.06.2017 and accordingly will not be exempt.