Sandipan Mitra is the CEO and co-founder of Pice. He boasts eight years of experience in the B2B and fintech sector. Sandipan's journey includes significant roles at multiple Indian Unicorns Including Product at PayU, and as founding member / VP, Product at Open Financial Technologies.
GST applies to interest on delayed payments as part of the transaction value.
The GST rate on interest is the same as the GST rate on the original supply.
GST on interest is payable when the interest is actually received, not when it is due.
No GST is applicable if the supplier waives the interest on delayed payment.
Failure to pay GST on interest can lead to penalties and legal consequences.
The introduction of GST (Goods and Services Tax) in 2017 necessitates GST payment for the supply of goods and services. GST regulations further have provisions for late fees, interests, and penalties for late GST payments or GST returns filing.
Suppliers can further charge interest for late payment along with GST from customers as compensation. Explore the scenarios when GST on interest charged to late-paying customers apply.
Recovery of Penalty/Interest on Delayed Payment
If a supplier charges an interest for delayed payment pertaining to the supply of goods and services, it is essential to pay the interest. Further, it is essential to pay the applicable GST on the supply amount payable and the interest charged to comply with GST laws. Non-payment of GST on interest indicates a deviation from the GST regulations and might lead to adverse legal implications or penalties.
Is GST on Interest on Delayed Payment Applicable?
The transaction value of the supply includes the interest charged by a registered person on delayed payment for a specific supply, from a customer. As a result, GST is applicable on the interest on delayed payment for the concerned supply.
The GST rate applicable for the supply of goods or services is the GST rate that applies to the interest charged on delayed payments. Consider the example below, elaborating on the scenario:
Mr. Shyam in Karnataka supplied a generator amounting to ₹5,00,000 to Miss Radha in Tamil Nadu on 1st November 2018. The due date for payment based on the terms of payment is 15th November 2018. However, Miss Radha defaulted on payment for supplies and paid on 15th December 2018, wherein there was a delay in payment by a month.
The applicable interest rate or late payment charges is 12% for every day of delay for recovery of payment. Thus, the amount of interest charged each day is ₹5,000. As the applicable GST rate on the generator is 18%, the same rate of tax will apply to GST on the interest charged. Further, for the interstate supply, the IGST (Integrated Goods and Services Tax) amount is ₹900.
Is GST liable to be paid on interest on the day it is due or the day it is paid?
The liability to pay GST on the interest charged is on the day you pay the interest and not the day the interest is due. Considering the example in the previous section, Mr. Shyam has the liability to pay GST on the interest charged on 15th December 2018 and not after the due date, which was after 15th November 2018.
Is GST Applicable on Interest Even if the Supplier Waives It Off?
In case the supplier decides to waive off the interest on delayed payment for the customer, GST on the interest amount will not apply. Considering the above example, if Mr. Shyam decides to waive off the interest of ₹900 for Miss Radha, no GST will apply to the interest amount.
However, GST on interest received will apply to debtors of the business. As a result, it is mandatory to include interest charged in the transaction value wherein the GST liability arises.
GST on interest charged to late-paying customers applies when the supplier charges interest for delayed payment, as a late payment fee, for a particular supply. However, no GST is applicable on the interest if the supplier decides to waive off the interest on delayed payment.
To avoid paying additional interest and GST on it, ensure you consider payments on time to suppliers. In case, the supplier charges an interest, you need to pay GST at the same tax rate applicable to GST of the concerned supply.
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FAQs
Is GST applicable on interest charged for late payment of invoices?
Yes, GST is applicable on interest charged for delayed payments, as it is considered part of the transaction value under GST law. The interest amount is subject to the same GST rate as the supply of goods or services.
When is GST on interest payable—on the due date or the payment date?
GST on interest is payable on the date when the interest amount is actually received by the supplier, not on the due date of the invoice. This ensures that GST liability arises only when the interest is realized.
What GST rate is applicable on interest for delayed payment?
The GST rate on interest is the same as the GST rate applicable to the supply of goods or services. For example, if the supply is taxed at 18%, then the interest charged on delayed payment will also attract 18% GST.
Is GST applicable if the supplier decides to waive off the interest?
No, if the supplier voluntarily waives the interest amount, then GST on the waived interest is not applicable. However, if interest is charged and collected, GST must be paid on it.
What are the consequences of not paying GST on interest for delayed payments?
Non-payment of GST on interest can lead to penalties, interest on unpaid tax, and legal consequences under GST law. Businesses should ensure compliance to avoid additional liabilities.
Sandipan Mitra is the CEO and co-founder of Pice. He boasts eight years of experience in the B2B and fintech sector. Sandipan's journey includes significant roles at multiple Indian Unicorns Including Product at PayU, and as founding member / VP, Product at Open Financial Technologies.
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