Is GST Payable on Late Payment Interest and Penalties?

The statutory position

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

So late payment interest is not a separate transaction. It is additional consideration for the original supply, valued and taxed accordingly.

Rate and timing

The rate is the rate of the underlying supply. Interest on a delayed payment for goods taxed at twelve per cent attracts twelve per cent, not eighteen.

The time of supply for this addition is governed by Section 12(6) and 13(6): the date on which the supplier receives the addition in value. That is helpful, because it means tax is not payable on interest that has accrued but not been collected.

Documenting it

Interest charged is generally documented through a debit note under Section 34(3), referencing the original invoice, since it increases the value of that supply. Where e-invoicing applies, the debit note requires its own IRN.

Charging interest without documenting it leaves the amount unreported, and collecting it without charging GST where GST was due creates a liability you have not funded.

The MSMED question

Interest under Section 16 of the MSMED Act arises by force of statute rather than by agreement, and is payable irrespective of any contract. A view exists that such interest is not consideration for a supply at all and therefore falls outside Section 15(2)(d).

The contrary view is that Section 15(2)(d) is wide enough to cover it. The position is not settled, and businesses charging substantial MSMED interest should take a considered position rather than assume either answer.

Frequently asked questions

### What GST rate applies to late payment interest?

The rate applicable to the underlying supply. Interest on a delayed payment for goods taxed at five per cent attracts five per cent. There is no separate rate for interest charged under Section 15(2)(d).

### When is the GST on interest payable?

On the date the supplier receives the interest, under Section 12(6) for goods and Section 13(6) for services. Interest that has accrued but not been collected does not trigger a liability.

### Is GST payable on a cheque bounce charge?

Generally yes, where the charge relates to delayed payment of consideration for a supply, since Section 15(2)(d) includes penalties for delayed payment in the value of supply. Charges that are genuinely penal and unconnected to consideration are more arguable.