TAXABILITY OF CHEQUE BOUNCING CHARGES UNDER GST

[Dr. Sanjiv Agarwal]

The bounce charges recovered by the appellant from their borrowers on account of the default of the borrowers, where their repayment instruments get dishonoured due to lack of the sufficient fund in their bank account, will attract GST. [IN RE: M/S. BAJAJ FINANCE LIMITED 2019 (8) TMI 116 - APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA]

In the instant case, the applicant was a NBFC engaged in providing various types of interest bearing loan to the customers such as auto loans, loans against the property, personal loans, consumer durable goods loans, etc. The applicant entered into agreements with borrower/customers which provided that the repayment of the loan would be in the form of Equated Monthly Installments (EMI) vide cheque/Electronic Clearing System (ECS), etc.   The EMI paid by the customers is a fixed amount payable at a specified date, which includes both interest and the principal amount. In case of dishonour of cheque/ ECS/ NACH or any other electronic or clearing mandate by the customers, the Applicant collects bounce charges, which is in line with the agreed terms and conditions of the agreement. The bounce charges are generally a fixed amount per default committed by the customer, for e.g. ₹ 350/- for each dishonour of cheque/ ECS.

In case of dishonour of cheque/ ECS/ NACH or any other electronic or clearing mandate by the customers, the applicant collected bounce charges, which was in line with the agreed terms and conditions of the agreement. Bounce Charges” Shall mean, dishonor of post-dated cheque/ ECS ADM/ entrusted by the borrower/co-applicant/co borrower for clearance of EMI (monthly installments) or non-payment of installment on or before respective due date for other modes. The Applicant was of the view that such bounce charges collected, were in the nature of penalty/ liquidated damages and therefore, the same was not a consideration for supply of service and hence, not be subjected to GST levy.

The applicant sought clarification from Authority for Advance Ruling on “whether the Bounce Charges collected by the Applicant should be treated as a supply under the GST regime”

The Authority for Advance Ruling ruled that the ‘cheque bounce charges’ collected by the applicant should be treated as a supply under the GST regime. [IN RE: M/S. BAJAJ FINANCE LIMITED 2018 (12) TMI 1154 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA ].

Being aggrieved, assessee preferred an appeal before Appellate Authority for Advance Ruling (AAAR), Maharashtra.

The AAAR observed that bounce charges charged by appellant as per mutual decision being consideration for such supply and no exemption being available, these charges are liable to GST.

Notification No. 12/2017-Central Tax (Rate) exempts interest or discount other than interest involved in Credit Card services. Term ‘interest’ as defined in said notification does not include any service fees or other charges in respect of money borrowed or debts incurred or in respect of any credit facility which has not been utilized. Bounce charges collected by appellant is clearly not on account of interest for delayed payment of consideration for which separate provision exists in loan agreement. Exemption was therefore not admissible.

Further, bounce changes recovered from defaulting customers is only in nature of damage or compensation for loss and is not consideration cannot be accepted - So long as tolerated act amounts to supply of service, any amount received in lieu thereof is consideration for such supply. Term ‘consideration’ under GST law wide enough to include monetary value of any act or forbearance. Here, bounce charges recovered from borrower are nothing but monetary value of act of tolerance from them.

The wordings of clause (d) of the Section 7(1) of the CGST Act are very clear and provide for inclusion of activities enlisted in Schedule II to be treated as supply of goods or as the case may be supply of services in the scope of supplies. Schedule II of the CGST Act provides the list of activities to be treated as supply of goods or services as provided therein. Clause (a) of Section 7(1) covers in its scope all forms of supplies for consideration. Clause 5(e) of the Schedule II to the CGST Act includes the activities to be treated as services and it covers the very activity in the form of expression “to tolerate an act or a situation” and thereby an act of tolerating bounce/dishonour of cheque/ECS/NACH are brought into the ambit of supply by treating it as a ‘supply of services’. There shall not be any confusion in the mind of anyone that the Legislature intentionally brought this activity of tolerating an act in the scope of supply of services. As explained in the above paras the appellant received the consideration and tolerated the act of bounce/dishonour of cheque/ECS/NACH. In view of these facts, on a harmonious and purposive interpretation of the above referred clauses under sub-section (1) of Section 7 of CGST Act it is very clear that they are dependent upon each other and a conjoint reading of Clauses (d) and (a) of Section 7(1) removes all doubt and makes it absolute clear that such an act of tolerating cheque bounce/dishonour is nothing but supply as mandated under [Section] 7 of the CGST Act, 2017.

The ‘interest’ requires to be construed not to include there in its ambit any other charges in respect to the money borrowed or debts incurred. The bounce charges collected by the Appellant is clearly not on account of interest for the delayed payment of the consideration for their supply, but for dishonour of the repayment instruments, such as bouncing of the cheques issued by the borrowers or the failure of the ECS for non-availability of the sufficient fund in the borrower’s account. Further, the Appellant is recovering separate amount at the fixed rate of interest under the head of “default interest”, as quoted in the loan agreement, on the delayed payment of the EMI by the borrowers. In view of these facts, we are of the opinion that the “bounce charges” in the present case are not covered in the interest meant for the purpose of the exemption and thereby not entitled for the exemption as claimed by the appellant.

Thus, the bounce charges recovered by the appellant from their borrowers on account of the default of the borrowers, where their repayment instruments get dishonoured due to lack of the sufficient fund in their bank account, will attract GST.

Further, it was held that rulings pronounced in other countries are not binding in Indian context and of no precedence under GST law in India.  The AAAR therefore, declined to interfere with the AAR ruling, upheld the original AAR ruling and dismissed the appeal.