No Cost EMI: a façade or a naïveté? How does GST come into the picture?

[Aporna Dasgupta]

Shopping online is no more a fad but a necessary change from the conventional way of shopping. It’s not just the convenience and the plethora of options available but online shopping also gives us the option of purchasing products at what is termed as “No Cost EMI”. Here, the banker gets business from the retailers, the retailers have the scope of increasing the sales volume by giving easy payment options to the consumers and, the purchaser has the convenience of deferring lump sum payment to spread out the cost over a period of time.

During this unprecedented time when the entire economy is at a major slow-down and cash inflow has become uncertain, we are all taking measures to ensure that there is a sufficient liquidity available. No Cost EMI is one such way to purchase products without having to make a major sacrifice on the working capital. It might be a drop in the ocean but desperate times call for desperate measures, doesn’t it?

What is ‘No Cost EMI’?

EMI as we know stands for Equated Monthly Installments. A traditional loan arrangement requires the person taking the load to repay in installments along with interest at a decided percentage.

However, when we sum up the installments paid as per ‘No-cost EMI’ scheme, the total amount out of your pocket would be equal to the cost of the product purchased. There is no excess interest component to be borne by the person taking the loan.

How do banks provide this facility?

The Reserve Bank of India (RBI) in its circular dated September 17, 2013, stated that the concept of zero per cent interest is non-existent and that it is just a marketing gimmick to lure customers into purchasing more.

To bypass the law stating that interest-free loans cannot be extended, the scheme actually withholds the discount that would have been given on upfront payment made and re-directs that amount of discount to the bank to cover the cost of interest.

Example for Case-I

Particulars	Amount
Cost of Mobile Phone	₹ 30,000/-
Discount amount	₹ 5,000/-
Interest to be paid on EMI	₹ 5,000/-
Amount payable	₹ 30,000/-

So here, we are ultimately paying the original price of the phone in installments. The retailer earns the discounted price of ₹ 25,000/- and the balance (i.e., the 'discount amount' of ₹ 5,000/-) goes to pay the interest on the loan.

The amount of discount being given is equated to the interest that is to be drawn from the customer. Hence, the total price you pay i.e., ₹ 30,000/- gets divided into price paid to retailer plus interest paid to financier. It’s just that this break up may not be visible on prima facie examination of the transaction.

Is this really a No-cost EMI?

As per an excerpt from Amazon website:

“The bank will continue to charge interest on EMI as per existing rates. However, the interest to be charged by the bank will be passed on to you as an upfront discount at the time of your purchase, effectively giving you the benefit of a No Cost EMI. This discount excludes GST on interest amount that will be charged by your bank.”

How does GST come into the picture?

As mentioned in the extract, “…excludes GST on interest amount that will be charged by your bank”, we see that over and above the interest portion (which you as a consumer are effectively bearing) there is an additional tax burden too.

What is the nature of interest that is being spoken about here?

 It can be one of the following two things:

1.  Interest to be added to the value of supply when interest arises by virtue of late payment. Hence it is added to the value as per section 15(2)(d) of CGST Act, 2017 and thereby liable to GST at the rate applicable to the supply procured.

Or

2.  Interest on loans and advances. Though it is known that interest is exempt by virtue of entry No. 27 of notification No. 12/2017-Central Tax (Rate) dated 28th June 2017.

Then why are the customers liable to pay GST on the interest?

Interest as per clause 2(zk) of the notification No. 12/2017-Central Tax (Rate) dated the 28th June, 2017, “‘interest’ means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized”.

Entry 27 of notification No. 12/2017-Central Tax(Rate) dated 28.06.2017 reads-

Services by way of'-

(a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services)

No-Cost EMIs are transactions that are routed through one’s bank account via the banker’s credit card facility/debit card facility. Since this interest is linked to the credit card services, the exemption is not available. Further, the definition of “interest” is not satisfied to claim the exemption. Thereby, the customers may get the interest portion as a discount in their invoice but will be liable to pay the GST on it by way of a charge by the banker.

The same has been clarified by Circular No. 102/21/2019-GST dated the 28th June, 2019.

What is the actual cost that you are paying?

The cost of the product and interest on the loan is built into the EMI. Moreover, GST on the interest charges also become an out of pocket expense. However trivial the amount may look, it certainly spikes up the effective cost of loan that can add up to a large sum as and when the term of the loan becomes longer.

Conclusion

Although No-cost EMI is a good option, it is always better to have knowledge about the actual transaction rather than falling for a misnomer as “No-cost” EMI, which does come with a cost.