GST on Interest on Delayed Payment by Customer

Tally Solutions |Updated on: August 24, 2021

Many suppliers have defined credit terms, which require their customers to make payment for supplies by a certain date. If the payment is not made, the supplier charges interest on the amount due from the customer. One of the major questions both suppliers and customers have - is GST charged on interest payment?

Let us understand the common queries which tax payers have with regard to treatment of interest charged by suppliers under GST.

Is GST on interest on delayed payment applicable?

Interest charged by a registered person from a customer on delayed payment for a supply will be included in the transaction value of the supply. Hence, GST on interest on delayed payment will be applicable.

What rate of GST will be applicable on interest?

The GST rate applicable to the supply for which the customer has delayed payment, will be the GST rate applicable on  interest.

Let us understand this with an example.

Mr. Ram in Karnataka supplies a generator for value of Rs. 5,00,000 to Mr. Mohan in Tamil Nadu on 1^st November, ‘17. The terms of payment are that Mr. Mohan should make payment for the supply by 15^th November, ’17 and if Mr. Mohan defaults in payment, interest @ 12% per annum will be applicable for every day of default in payment. Mr. Mohan makes the payment on 15^th December, ’17.

Here, Mr. Mohan defaults in payment by 30 days. Hence, Mr. Ram charges interest @ 12% for 30  days on Rs. 5,00,000/-, which will amount to Rs. 5000. The rate of GST applicable to generators is 18%. Since this is an interstate supply, IGST @ 18% will be applicable on interest amount of Rs. 5,000. Hence, IGST of Rs. 900 will be applicable.

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 interest arises on the day the customer pays the interest, not on the day the interest becomes due. For example, in the above case, the liability to pay GST on interest arises when Mr. Ram makes the interest payment on 15^th December, ‘17, not when it becomes due on 16^th November, ’17.

Is GST applicable on interest even if the supplier waives it off?

If a supplier decides to waive off the interest which is due from a customer on delayed payment, GST will not be applicable on the interest.

In the above example, when Mr. Mohan makes the payment of Rs. 5,00,000 for the supply, interest of Rs. 5,000 + IGST of Rs. 900 is applicable for delayed payment. However, Mr. Mohan decides to waive off the interest. In this case, as no interest is paid, no GST on interest will be applicable.

Hence, GST on interest received from debtors of a business will be applicable. In other words, interest charged and collected by a supplier on a supply has to be included in the transaction value and GST is liable to be paid on the same.