OCTOBER 18, 2017

By Nikhil Agarwal, B.Com (Hons), ACA and Vishwanath K, ACA, LLB

INDIA has witnessed a tectonic shift in the indirect tax law with the introduction of Goods and Services Tax (GST) laws w.e.f 1 st July 2017. Several taxpayers may have an optimistic approach towards GST on an assumed fact that GST being a good and simple tax thereby the potential disputes could be very less. Veritably, whether the disputes would be less in GST regime? The answer to the question may not look soothing for taxpayers since there are numerous issues which are sprouting from the GST laws which are prone to disputes.

One of the commonest transactions which can occur in day-to-day business is the interest charged on delayed payment of consideration towards supply of any goods or services. Indisputably, vide Section 15(2)(d) of the Central Goods and Services Tax Act, 2017 (CGST Act), the value of supply includes interest or late fee or penalty for delayed payment of any consideration for any supply.

The valuation provisions clearly formulate that the transaction value includes interest or late fee or penalty for delayed payment of any consideration for any supply. However, the moot question which arises is whether the amounts collected as interest on delayed payment of consideration for supply of any goods or services will partake the nature of supply of goods or services?

Let us decipher the same through a case study.

Case Study

Let us take a simple scenario where Company A Ltd. supplies goods which attracts GST at 12% to Company Y Ltd. on a three month credit period. Company A Ltd. can impose a condition on such supply of goods which stipulates that in case Y Ltd. fails to pay or does not pay the agreed consideration within the credit period, Company A Ltd. would charge interest (let's say @ 10%) on the payments due from the date of supply till the date of payment of such consideration and Y Ltd also agrees to such conditions.

Hypothesis-1

Before putting forth the hypothesis, let us place certain provisions of GST law in perspective.

Section 15(1) of CGST Act provides that the value of supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

Section 15(2)(d) of the CGST Act provides that the value of supply shall include interest or late fee or penalty for delayed payment of any consideration for any supply.

Unlike the Central Excise Act, 1944, GST Law does not define the word "Transaction Value". However, GST being an indirect tax akatransaction based tax, transaction value has to be determined based on every supply. Further, the expression 'supply' includes/ connotes all forms of supply made or agreed to be made for a consideration by a person connotes that supply is qua an agreement. When read in that context, the expression "For the said supply" in Section 15(1) finds its relevance and significance. The transaction value is value as determined and agreed between the parties to a contract / agreement.

However, when the expression "for any supply" used in Section 15(2)(d) is read along with expression " for the said supply " employed in Section 15(1), there arises a difficulty or rather incongruity to provide a harmonious interpretation.

Whether the legislature intends to include such interest on delayed payment of consideration in the value of the "same / said supply" i.e. the immediate /previous supply (irrespective of whether the previous supply is of goods or services or composite or mixed) or that of "any supply"?

One must note that the expression "at time of or before delivery of goods or supply of services" is employed only under Section 15(2)(c) in the context of incidental expenses charged by the supplier to the recipient of a supply. The same does not find its place either in Section 15(1) or Section 15(2)(d) of CGST Act.

Though the word "removal" in relation to goods has been defined under the CGST Act, cautiously,the same has not been employed in Section 15 of CGST Act. However, the same finds its place in Section 31 which discusses Tax invoice, Credit and Debit Notes.

Therefore, when the previous/ immediate supply is concluded by way of raising a tax invoice (since removal or delivery of goods has been concluded), whether it is justified that the interest on delayed payment of consideration can be included in the transaction value of an already concluded supply (to the extent invoice has already been raised) since the expression used in Section 15(1) connotes "said supply".

If harmonious interpretation rule is to be applied then the expression 'any supply' in section 15(2)(d) refers only to "said supply" used in section 15(1) of CGST Act.

Cue can also be drawn from Section 12 of the CGST Act provides that the time of supply of goods. Section 12(6) provides that the time of supply of goods to the extent it relates to an addition in the value of supply by way of interest, late fee or penalty for delayed payment of any consideration shall be the date on which the supplier receives such addition in value.

Similar provision is also available in Section 13 which provides for time of supply of Services.

Further, Section 34(3) provides as follows;

Where a tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to be less than the taxable value or tax payable in respect of such supply, the registered person, who has supplied such goods or services or both, shall issue to the recipient a debit note containing such particulars as may be prescribed.

Thus, one can take a view that the interest on delayed payment charged to the customers can be treated as "taxable value charged in tax invoice is found to be less than the taxable value in respect of such supply"

Therefore, the interest on delayed payment of consideration for supply of any goods or services will partake the nature of said supply i.e. supply of goods in the given case study. Hence, A Ltd.has to issue / raise a Debit Note with reference to the earlier tax invoice. Further, the timing of issue of debit note has to be looked into taking into account the provisions of time of supply as provided under Section 12(6) or Section 13(6) of CGST Act.

Hypothesis-2

In case the expression 'for any supply' does not refer to the "said supply" and the amount of interest on delayed payment of consideration is collected as an additional activity by the A Ltd despite the fact the same relates to previous supply of goods, it can be said that the interest amount collected is a part of financial services provided by A Ltd and can be characterised as 'Supply of Services" considering the same to be an independent supply.

In such a case, A Ltd. has to raise a Tax Invoice for "Supply of Services" by appropriately classifying the services and adopting the appropriate rate of GST.As discussed above, the provisions of time of supply of services as provided under Section 13(6) of CGST Act has to be complied with.

A thought can arise as to whether A Ltd can treat the said activity i.e. interest on delayed payment of consideration as a part of "Composite Supply" where the principal supply is that of Supply of Goods can be explored. However, composite supply in itself is like a Pandora's box waiting to be opened.

Before parting…

The determination of exact nature of supply even in a simple scenario as discussed above may not be as simple and good as it is being perceived especially where the rate of tax varies between the nature of supplies. It is not uncommon that the revenue authorities may take view which would entitle them more revenue.

Therefore, it is a legitimate expectation of trade and industry that the issue relating to the treatment of the interest on delayed payment of consideration gets more clarity at the earliest by way of circular (and not through twitter or FAQs which admittedly do not hold any legal validity) so that the taxpayer gets a sigh of relief.

(The views expressed are strictly personal.)