The ongoing pandemic has disrupted the businesses in India adversely wherein taxpayers are avidly expecting certain exemptions which could offer them the ease of doing business.
On the flip side, one among the authorities of Advance Ruling (AAR) has ruled that GST liability must be discharged under reverse-charge mechanism on the amount of interest calculated on delayed payment for imported goods.
Such rulings burden the taxpayer with additional liabilities instead of providing relief to them. It thus puts the taxpayer under the spotlight to discharge their GST liability well in advance so that they are not burdened with any variation or consequences later. Read More: New Functionality Set In Motion: Explanation & Explication
However, taxpayers may take another view from such ruling is that once business apprehend their GST liability well in advance, then they are saved from any variation or gap that successively may lead to consequences.
Brief Facts
The applicant M/s Enpay Transformers Components India Pvt. Ltd. (Hereinafter referred to as Enpay, India) has been involved in the business of manufacturing and supplying the transformer components.
The applicant has further stated that the company is importing goods from its holding company M/s Enpay Endstriyel Pzarlamave Yatirim A.S. (Hereinafter referred to as Enpay, Turkey).
It is stated in the term of payment that uniting the applicant and Enpay Turkey, that 120 days are assigned for payment of credit.
And if the applicant does not pay the invoice sum within aforesaid 120 days from the date of invoice for import of goods, the applicant is liable/responsible to pay the interest on late payment.
Matter in Question
The applicant has been on the lookout for the advance ruling on the concern of whether the liability to pay GST on Reverse charge jump up if the amount is paid as interest on late payment of invoices of imported goods. If yes, then at what rate?
Discussion
To impose GST, we first need to find out whether the said activity is covered undersupply of service or goods. For this purpose, we will refer to Section 7 of CGST Act, 2017 which covers the expression “Supply”. As per Section 7(1A) of CGST Act, where certain activities or transactions constitute a supply as per Section 7(1), they shall be treated either as the supply of goods or supply of services as referred to in Schedule II i.e., transaction must be constituted as a supply under section 7 to fall within the ambit of Schedule II.
In the instant case, Enpay, Turkey was supposed to receive the payment within 120 days from the date of invoice in respect of goods supplied by them to Enpay, India but instead, he was made to tolerate the act of non-receipt of payment for which interest was to be paid by the Enpay, India. Therefore, the above-mentioned activities will be covered under Entry 5(e) of Schedule II which states that agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act, thus classifying it as the supply of service.
Also, special attention is required on Entry 1 of Notification No. 10/2017 – Integrated Tax (Rate) dated 28th June 2017 which specifies that any service supplied by any person who is located in non-taxable territory to any person other than non-taxable online recipient shall be paid on reverse charge basis by such recipient.
Aside, payment of interest made by Enpay, India to Enpay, Turkey is connected to the goods imported and the late payment of the value of goods imported by them from Enpay, Turkey, it thus becomes necessary to take into consideration the provision of Section 15 of the CGST Act, 2017 which covers the valuation aspect in respect of the supply of goods and services. As per Section 15(2)(d), the value of supply includes interest or late fee or penalty for delayed payment of any consideration for any supply.
Therefore, late payment of interest made by Enpay, India to Enpay, Turkey will form part of the value of supply, and GST liability will be discharged on the same.
Take Away
In the view of the abovesaid discussion, it is concluded that the payment of interest by Enpay, India will be covered undersupply of services under Entry no. 5(e) of Schedule II to the CGST Act, 2017 and is liable to GST given the provisions of Section 15(2)(d) of the said act. GST shall be paid on a reverse charge basis as per the above-mentioned notification. The applicable rate on such RCM is the same rate of IGST at which such imported goods were taxed.
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Posted by:
CA Tarun Kapoor
AKGVG & Associates