APPLICABILITY OF GST ON PENALTIES IMPOSED BY RESERVE BANK OF INDIA

[Mr. M. GOVINDARAJAN]

The Reserve Bank of India (‘RBI’ for short) is a statutory body established under the Reserve Bank of India Act, 1934. RBI is the monetary authority. It is a regulator and supervisor of the banking and financial system. It issues the currency of our country. It is also the regulator and supervisor of Payment and Settlement systems and managing the foreign exchange.

RBI is administering various laws such as Reserve Bank of India Act, 1934, Government Securities Act, 2006 read with Government Securities Regulations, 2007, Banking Regulation Act, 1949, Foreign Exchange Management Act, 1999, Credit Information Companies (Regulation) Act, 2005, Payment and Settlement Systems Act, 2007 and regulations, 2008 and Factoring Regulation Act, 2011.

RBI levied penalties for contravention of any of the provisions of the above said laws. The penalties imposed by RBI are of two types-

• Category A – Penalty, late fees/penal interest, fine of the nature levied and collected by RBI for contravention or violation of provisions of law;
• Category B – Penalty of the nature of non-performance or under performance as per contractual agreement with third party vendors.

The RBI filed an application before the Maharashtra Authority for Advance Ruling, seeking rulings on the following questions-

• Whether the penalties, late fees/penal interest, fine of the nature, levied and collected by RBI for contravention or violation of the provisions of law are taxable under GST?
• Whether the penalty of the nature for non-performance or under performance as per contractual agreement by RBI with third party vendors are taxable under GST?

In respect to category A penalty the RBI relied on the circular issued by the Department in Circular No. 178/10/2022-GST, dated 03.08.2022. In the said circular the Department observed that penalties imposed for violation of laws cannot be regarded as consideration charged by Government or a Local Authority for tolerating violation of laws. Laws are not framed for tolerating their violation. They stipulate penalty not for tolerating violation but for not tolerating, penalizing and deterring such violations. There is no agreement between the Government and the violator specifying that violation would be allowed or permitted against the payment of fine or penalty. There cannot be such an agreement as violation is never a lawful object or consideration. The RBI contended that GST is not applicable on penalties, late fees/penal interest, fine imposed for violation of laws. The penalties etc., imposed by RBI are similar to that of penalty, late fees/penal interest, fine levied under various other Acts.

The RBI further submitted that the sole objective for levy of penalties etc., is to inculcate discipline amongst the regulates as it acts as a deterrent for them. Penalties etc., are imposed by RBI to ensure prompt/correct reporting. But actually, the violations are not resulting in utilization of RBI’s funds. It may be due to unintentional or arithmetical errors, inexperience of staff etc. The concerned banks would contend that these shall not be considered as valid grounds of penal interest.

RBI further contended that delayed reporting where currency chests had ‘net deposit’. Penal interest at the prevailing rate for delayed reporting of the instances where the currency chest had reported net deposit shall not be charged. However, in order to ensure proper discipline in reporting currency chest transactions a flat penalty of Rs. 50000/- shall be levied on the currency chests for delayed reporting, irrespective of the value of the net deposit.

RBI relied on the FAQ issued by the Board. Qn. No. 49 – Would imposition of fine or penalty for violation of a provision of law be a consideration for the activity of breaking the law, making such activity as service? The answer to the above question is-

‘No. Fines and penalties are imposed for breaking the law by a person. They are not in the nature of consideration for an activity and hence, would not constitute a supply of service’.

RBI, in the light of circular issued by a Board, contended that the levy of penalties, late fees/penal interest, fine levied and collected by RBI under Category A, being for contravention of certain legal provisions of that particular law, cannot be regarded as satisfying the definition of ‘consideration’ towards a supply under the GST Act and therefore, cannot be taxed under the provisions of GST law.

In respect of penalty of category B, RBI making reference to the circular dated 03.08.2022 which provides that GST is not applicable on liquidated damages where the amount is paid only to compensate for injury, loss or damage and such payments do not constitute consideration for a supply. RBI levied penalty for breach of terms of contractual agreement entered between RBI and the vendor which is akin to the liquidated damages as referred in CBIC circular. This penalty cannot be said to be a consideration received for tolerating the breach of contract. The payment of liquidated damages is stipulated in a contract to ensure performance and to deter nonperformance, unsatisfactory performance of contract.

In the case of penalty levied by RBI there is no consideration flowing in lieu thereof vide the contractual terms and conditions for levying the penalties. Therefore, RBI contended that the penalty if any levied by RBI on account of breach of terms and conditions of contractual agreement cannot be eligible to levy GST.

The jurisdictional officer submitted its opinion as the payments received in the form of penalties, late fees/penal interest, fine of the nature levied and collected by RBI, for contravention or violation of provisions of Law or Penalty of the nature for nonperformance under performance as per contractual agreement by RBI with third party vendors are not taxable as such payments do not constitute consideration for a supply.

The Authority for Advance Ruling offered a personal hearing to RBI. The Authority for Advance Ruling analyzed the facts put forth by RBI and also the jurisdictional officer. The Authority for Advance Ruling also analyzed the circular issued by the Department vide No. 178/10/2022-GST, dated 03.08.2022.

The Authority for Advance Ruling held that the penalty, late fees, penal interest, fine etc. levied and collected by RBI for contravention or violations of various laws administered by RBI are for the purpose of maintaining discipline and deterrence in the regulatee banks, non-banking financial institutes and other institutes. The Authority is bound by the circular and held that these activities are not in the nature of a consideration for an activity and hence would not constitute a supply of service.

In respect of the second question the Authority for Advance Ruling held that the principles laid down in the circular dated 03.08.2022 is applicable the penalties in nature of liquidated damages levied on RBI on third party vendors for non-performance as per contractual agreement. The Authority is bound by the circular and hence rules that these activities are not in nature of a consideration for an activity and hence, would not constitute a supply of service.