Cheque-bounce charge to attract GST, rules AAAR

Charges levied in case of cheque bounce will attract Goods & Services Tax (GST), says a ruling by Maharashtra’s Appellate Authority for Advance Ruling (AAAR).

New circulars

Accordingly, AAAR has upheld the ruling by the Authority by Advance Ruling (AAR). Technically speaking, the ruling by AAAR or AAR is persuasive than referral in similar matters. They are applicable only to the applicant and jurisdictional officer related with the application. However, tax policymakers use them in new circulars and notifications. Also, once such ruling is challenged in the High Court, then direction given by the Court can be used as referral in similar matters.

In this case, the applicant, Bajaj Finance Limited, is in the business of auto loans against property and personal loans. The loan agreement provides for repayment of EMI or outstanding dues through cheque/ Electronic Clearing System/National Automated Clearing House, or any other electronic or clearing mandate. In case of default in repayment by way of dishonour of cheque, or any other electronic credit system, the appellant charges a fixed fee of ₹350 as ‘bounce charges.’

The applicant approached the AAR seeking clarity on whether the bounce charges collected should be treated as supply under the GST regime. Its contention was that post GST, bonus charges are in nature of penalty or liquidated damages and, therefore, the “same is not a consideration for supply of service and, hence, should not be subjected to the levy of GST”. Considering the ambiguity on taxability of penal/bounce charges under the GST law, as an abundant caution, the applicant moved to AAR.

Supply of services

Meanwhile, AAR ruled that such charges collected by the applicant amounts to the supply of services and, hence, will be liable to GST. Aggrieved by this decision, the applicant went for appeal. In the grounds of appeal, it claimed that the order by AAR is a non-speaking order, since each of the contention put forth by the appellant has not been countered and the order has been issued without drawing premise. Further, it was submitted that the ‘bounce charges’ collected do not fall in the ambit of supply, as per the definition provided in GST law.

Moreover, the ‘bounce charges’ do not have a ‘quid pro quo’; hence, it cannot be said that these charges are recovered under a contract, which eventually would lead it to become the consideration. Thereafter, it was submitted that such charges do not constitute a separate contract, and it is a part of the original contract, and hence, the money recovered should be adjudged as such. However, the Appellate Authority said that the agreement between the appellant and its customers has clearly stated the defaults in payment of EMIs, as also the bouncing or dishonour of cheque to be deemed as defaults, and has recourse to recall the loan or cancel the agreement or to initiate proceedings under legal recourse or take possession of the product; the authority said this is a supply covered under the Act and, accordingly, will be liable for GST .

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