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RE: BAJAJ FINANCE LTD.

Re: Bajaj Finance Ltd (2019, Maharashtra AAAR)

ISSUE:

  • Whether the company is liable to pay Goods and Services Tax (GST) on the penal Charges that it recovers from its borrowers for late payment of EMIs?

RULE:

  • The rule in Re: Bajaj Finance Ltd., 2019 is still being determined by the Supreme Court of India. However, there have been conflicting rulings from different courts and tribunals on the issue of whether GST is payable on penal charges recovered from borrowers for late payment of EMIs.

FACTS:

  • Bajaj Finance Ltd. (BFL) is a non-banking financial company (NBFC) that provides a variety of loan products to its customers.
  • BFL charges its borrowers penal charges for late payment of EMIs.
  • The question of whether BFL is liable to pay Goods and Services Tax (GST) on the penal charges it recovers from its borrowers is a complex one.
  • There is no clear consensus on this issue, and there have been conflicting rulings from different courts and tribunals.
  • Some courts and tribunals have held that the penal charges are not subject to GST because they are not a consideration for the supply of any goods or services.
  • Rather, they are a penalty imposed by the company on its borrowers for breach of contract.
  • Other courts and tribunals have held that the penal charges are subject to GST because they are a part of the overall consideration that the borrowers pay to the company for the loan products that they avail.

HELD:

  • The Supreme Court of India has not yet ruled on the issue of whether or not GST is payable on penal charges recovered from borrowers for late payment of EMIs.
  • Therefore, the current state of the law is unclear.
  • The Bombay High Court and the Karnataka High Court have given conflicting rulings on this issue.
  • The Bombay High Court held that the penal charges are not subject to GST, while the Karnataka High Court held that they are subject to GST.
  • The Supreme Court is expected to rule on this issue in the coming months.
  • It is likely that the Supreme Court’s ruling will have important implications for all NBFCs that charge penal charges for late payment of EMIs.
  • In the meantime, it is advisable for NBFCs to consult with a tax expert to determine their GST liability on penal charges recovered from borrowers for late payment of EMIs.