2022 (10) TMI 1217 - AAR - GST

Levy of GST - prepayment premium to be charged by PFC New Delhi for prepayment of loans - HELD THAT - The Central Board of Indirect Taxes and Customs (CBIC) has issued two Circulars - one Circular No. 102/21/2019-GST dated 28.06.2019 clarifying the issue of applicability of additional/penal interest and other Circular No. 178/10/2022-GST dated 03.08.2022 regarding GST applicability of liquidation damages compensation and penalty arising out of breach of contract or other provisions of law . The Circular No. 102/21/2019-GST dated 28.06.2019 clarifies doubts regarding admissibility of GST on additional/penal interest on the overdue loan i.e. whether it would be exempt from GST in terms of SI. No. 27 of notification No. 12/2017-Ccntral Tax (Rate) dated 28th June 2017 or such penal interest would be treated as consideration for liquidated damages amounting to a separate taxable supply of services under GST covered under entry 5(e) of Schedule II of the Central Goods and Services Tax Act 2017. On the other hand the Circular No. 102/21/2019-GST dated 28.06.2019 in para 7.1.6. has analysed the situation where some banks charge pre-payment penalty if the borrower wishes to repay the loan before the maturity of the loan period and clarified that such amounts paid for acceptance of late payment early termination of lease or for pre-payment of loan or the amounts forfeited on cancellation of service by the customer as contemplated by the contract as part of commercial terms agreed to by the parties constitute consideration for the supply of a facility namely of acceptance of late payment early termination of a lease agreement of prepayment of loan. Therefore such payments even though they may be referred to as fine or penalty are actually payments that amount to consideration for supply and are subject to GST in cases where such supply is taxable. In the present case of the applicant the applicant has simply stated that the PFC has raised the demand of prepayment premium of Rs. 16, 85, 71, 429/-. It is not clear as to whether the prepayment premium includes additional/penal interest or pre-payment penalty . As the additional/penal interest is in the nature of Interest whereas the prepayment penalty is in the nature of fine/penalty - in case the consideration is represented by penal interest for prepayment of loan amount the same shall be exempted from payment of GST in terms of SI. No. 27 of notification No. 12/2017-Central Tax (Rate) dated the 28.06.2017. Hence it can be seen that in both the conditions i.e. whether the prepayment premium includes additional/penal interest or pre payment penalty there shall not be any GST on the prepayment premium to charged by PFC New Delhi for pre-payment of loan under CGST Act 2017.

Issues Involved:
1. Eligibility of the application for advance ruling.
2. Taxability of the prepayment premium charged by PFC for prepayment of loans under CGST Act, 2017.

Detailed Analysis:

1. Eligibility of the Application for Advance Ruling:
The application for advance ruling was filed under Section 97(2) of the CGST Act, 2017, which outlines specific issues for which an advance ruling can be sought. These include classification of goods or services, applicability of notifications, determination of time and value of supply, admissibility of input tax credit, liability to pay tax, registration requirements, and whether any activity amounts to a supply of goods or services. The query by the applicant falls under these provisions, making the application eligible for a ruling by the Punjab State Advance Ruling Authority.

2. Taxability of the Prepayment Premium Charged by PFC:
The core issue is whether the prepayment premium charged by Power Finance Corporation (PFC) for the prepayment of a loan is taxable under the CGST Act, 2017. The applicant, Punjab State Power Corporation Limited (PSPCL), sought clarity on this matter, highlighting that the principal supply of loan services by PFC is exempt under GST as per Notification No. 12/2017-Central Tax (Rate) dated 28 June 2017.

Submissions by the Applicant:
PSPCL argued that the prepayment premium should be considered ancillary to the principal supply of loan services, which is exempt from GST. They referred to GST Circular No. 178/10/2022-GST dated 03.08.2022, which states that amounts paid for pre-payment of loans constitute consideration for the supply of a facility and are subject to GST only if the principal supply is taxable. Since the principal supply (loan services) is exempt, the prepayment premium should also be exempt.

Submissions by the Jurisdictional Authority:
The jurisdictional authority contended that financial and related services are generally taxable at 18% under Notification No. 11/2017-Central Tax (Rate) dated 28 June 2017 and Notification No. 27/2018-Central Tax (Rate) dated 31 December 2018.

Discussion and Findings:
The Authority examined the relevant circulars issued by the Central Board of Indirect Taxes and Customs (CBIC). Circular No. 102/21/2019-GST dated 28.06.2019 clarified that additional/penal interest on overdue loans is exempt from GST as it falls under the definition of "interest" in Notification No. 12/2017. However, Circular No. 178/10/2022-GST dated 03.08.2022 clarified that prepayment penalties are considered consideration for the supply of a facility and are taxable if the principal supply is taxable.

Conclusion:
The Authority concluded that the prepayment premium could either be "additional/penal interest" or "prepayment penalty." If it is additional/penal interest, it is exempt from GST under Notification No. 12/2017. If it is a prepayment penalty, it is considered ancillary to the principal supply of loan services, which is exempt from GST. Therefore, in both scenarios, the prepayment premium charged by PFC for the prepayment of loans is not subject to GST under the CGST Act, 2017.

Ruling:
The prepayment premium charged by PFC, New Delhi, for prepayment of loans is not taxable under the CGST Act, 2017.

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