In a significant ruling, the Maharashtra Authority for Advance Rulings (AAR) has determined that penalties, late fees, penal interest, and fines imposed by the Reserve Bank of India (RBI) are not subject to Goods and Services Tax (GST). The decision, outlined in Order No. GST-ARA-117 of 2022-23/2024-25/B-53 aligns with the clarifications provided in the CBIC Circular No. 178/10/2022-GST, ensuring that such payments are not treated as consideration for any supply.
The case was brought forward by the RBI, which in its regulatory capacity imposes various penalties and fines under different acts and regulations, such as the RBI Act, Government Securities Act, Banking Regulation Act, FEMA, and others. These penalties, primarily punitive, are intended to enforce compliance with legal and regulatory provisions.
Additionally, the RBI engages third-party vendors for various services, including maintenance contracts. Penalties are levied under these contracts for non-performance or under-performance, such as downtime penalties for equipment malfunction. These penalties are compensatory, tied to the non-fulfillment of contractual obligations.
Issue raised
The core issue raised by RBI was the applicability of GST on penalties and fines imposed under two categories:
Category A: Penalties, late fees/penal interest, and fines levied by RBI for contravention or violation of legal provisions.
Category B: Penalties imposed for non-performance or under-performance under contractual agreements with third-party vendors.
Ruling overview
The AAR, in its detailed ruling, addressed both categories separately:
Category A: Penalties for violation of law: The authority concluded that penalties levied by RBI for contravention or violation of laws do not constitute a supply of service under GST. As a result, GST is not applicable to penalties, late fees, and fines imposed by RBI for such violations.
Category B: Penalties for contractual non-performance: The AAR agreed that penalties for non-performance or under-performance under contractual agreements are akin to liquidated damages. These penalties, intended to compensate for injury, loss, or damage due to breach of contract, do not qualify as consideration for any independent activity. Hence, no GST is applicable on such penalties.
Implications
This ruling provides clarity on the treatment of penalties, fines, and late fees under GST, particularly for regulatory bodies like RBI. It also affirms the stance that such penalties are not to be considered as a taxable supply of services, thereby exempting them from GST.
