Overview on RBI Penalties is not a ‘Supply’ Under GST law :
- The recent ruling by the Maharashtra Authority for Advance Ruling on RBI penalties and GST offers a clear interpretation in alignment with Goods and Service Tax laws and guidelines. AAR has delivered an important clarification regarding the taxability of penalties, late fees, penal interests, and fines levied by the Reserve Bank of India.
- RBI sought clarity on whether penalties and fines it imposes for regulatory breaches constitute a “supply” under the GST framework. The application was filed u/s 97 of the CGST Act, 2017
- Penalties, late fees, & fines imposed by the Reserve Bank of India on banks & Non-Banking Financial Company for regulatory breaches do not qualify as a ‘supply’ under the Central Goods And Services Tax Act, 2017.
- This decision reinforces the distinction between regulatory actions and commercial transactions under Goods and Service Tax law.
Scope of RBI’s Penalties and Fees:
As India’s central bank, the RBI operates as the Monetary Authority, Regulator and Supervisor of the banking and financial system, Manager of Foreign Exchange, Issuer of Currency, & Regulator of Payment and Settlement Systems. RBI detailed various monetary sanctions, such as:
- Non-maintenance of Cash Reserve Ratio & Statutory Liquidity Ratio under the RBI Act, 1934.
- Penalty for bouncing Subsidiary General Ledger Account Forms under the Government Securities Act, 2006.
- Late submission fees for regulatory reporting related to External Commercial Borrowings & Trade Credits under FEMA, 1999
Application Filed by RBI :
- RBI sought clarity through an advance ruling application under Section 97 of the Central Goods And Services Tax Act, 2017, to determine whether such penalties could attract GST. This query was pivotal, as these penalties are a significant part of enforcing regulatory compliance.
CBIC Circular No. 178/10/2022-GST :
- RBI referred to this circular, which specifies that penalties levied for breach of legal provisions are not a consideration for any taxable service.
- The circular helped emphasize that these penalties are punitive and not linked to the provision of services.
Authority for Advance Ruling’s Justification :
2 Member AAR bench, comprising Ajaykumar V. Bonde (Joint Commissioner of State Tax) and Priya Jadhav (Joint Commissioner of Central Tax), concluded that these monetary sanctions are:
- Not a supply under GST: They are punitive measures, not payments for services.
- Not a consideration: Penalties aim to deter violations and enforce compliance, not to tolerate breaches or provide a benefit.
The Authority for Advance Ruling ruled that the purpose of these penalties is to enforce compliance with regulations, not to provide any service or benefit to the entity being penalized. Thus, they do not constitute a taxable supply under GST, making them exempt.
- The ruling referred to Paragraph 7.4 of the CBIC Circular, emphasizing that such penalties cannot be considered charges for tolerating breaches.
Final Verdict RBI Penalties is not a ‘Supply’ Under GST law:
No GST is applicable on penalties, late fees, or fines imposed by RBI on regulated entities like banks and NBFCs. The ruling underscores the distinction between compliance enforcement and commercial activity under GST.
Banks and NBFCs can exclude RBI-imposed penalties from GST calculations, simplifying compliance.
- Regulatory Actions Remain Outside GST Scope: This ruling reiterates that regulatory measures like penalties for non-compliance are not commercial transactions subject to GST.
- Regulatory penalties are seen as instruments of compliance enforcement, not a revenue-generating activity subject to GST.
- Clarity for Financial Institutions: Banks and NBFCs can rest assured that penalties imposed by RBI for regulatory breaches do not carry additional GST liability.
- Banks, NBFCs, and other regulated entities are exempt from GST on penalties and fines imposed by the RBI for non-compliance with statutory requirements
- Consistency with Tax Principles: It aligns with the overarching principle that taxes on punitive charges meant to enforce compliance are not in the scope of GST.
This aligns with existing guidelines, ensuring regulatory measures are not subject to indirect taxation.
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