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NO GST ON INTEREST ON LOAN BY DEL-CREDERE AGENT
Act as a guarantor of credit extended to the buyer. A Del credere agent can act as a combination of a salesperson and an insurance firm. A Del credere agent becomes liable to pay the principal if the buyer made any default on payment. But if the principal is unable to collect his payment for other reasons, like a dispute over the delivery of the goods, then the agent is not liable for payment. Payment paid for any insurance services provided in form of commission, known as a "del credere commission."
Del Credere Agency works as:-
- The Del credere agent works as a bridge to connect to both the buyer and seller of the products or services having an interest in the transaction. They guarantee that the buyer will pay for the products or services appropriately.
- They usually charged higher rates because they take a higher amount of risk. A del Credere agent likes to work with buyers having a good credit rating or level of solvency to ensure they will consistently pay their bills.
- A Del-credere agent (DCA) is a sales representative who serves as a mediator between the principal and third parties for the supply of products or services in lieu of charge.
- The very aim of choosing the DCA service from the principal is to secure payments from the buyer. They are in touch with prospective customers and negotiate a contract between the principal and the customer on a commission basis. The following events are taking place in such a scenario:
1. Supplying goods from the principal to the recipient;
2. Supply of DCA agency resources to the provider or client or both;
3. Supply to the beneficiary of the extension of the loan facilities by the DCA.
In order to make sure prompt payment to the supplier, the DCA can use a variety of techniques, include
- Provide the purchaser with short-term transaction-based loans to pay the principal, or
- On the deadline, to be paid by the seller himself and afterwards, to be recovered by the purchaser with a certain interest. The borrower shall pay the loan to DCA at a collectively satisfactory interest rate.
The temporary credit given by DCA to the purchaser shall not be treated as an independent supply and shall be included in the distribution of the goods by the DCA to the recipient since the loan is given by DCA is part of the supply of the goods rendered by the DCA to the recipient.
In addition, the amount of interest paid for such credit must also be included in the value of the supply of products by DCA to the receiver pursuant to section 15(2)(d) of the CGST Act.
As per Section 15(2)(4) of CGST ACT. GST is applicable on interest and penalty on the buyer by the seller on account of delay in payment regarding supply.
Example: X supplied goods amounting to Rs 1, 00,000 (including GST @ 12%) to Y on 01.06.2018 with the condition that he received payment by 30.06.2018 failure of which interest will be applicable.
So, if Y made a payment of Rs 1, 00,000 on 31.08.2018, and as a result of which X levies interest of Rs 20,000. Then in this situation, X is required to pay GST @ 12% on Rs 2,000 assuming this is received for the goods provided.
In the case, Shreenath Polyplast (P) Ltd (2018) 93 taxmann.com 178 (AAR-Gujarat)
- who is a del credere Agent who has submitted an application for Advance Ruling? DCA gets the commission from the principal for which DCA raises invoices on the principal along with GST.
- The Buyer is unable to pay the Supplier and approach del credere Agency to extend short term loan. Thus, DCA extends the loan by making payments to the principal on behalf of the customer.
- The rate of interest of such short term transaction-based loan is agreed between the buyer and the del credere agent. In some cases, the customer gives a letter of credit which gets discounted by the del credere agent.
- In this case, it is also submitted that the Supplier is not continuing supply to the customer until the bills are paid by the customer. Since the customer arranged the payment through DCA, the customer gets an uninterrupted supply from the supplier.
- Del credere agent gives loan to the buyer and charges interest thereon from them. Hence it comes under the Sr. No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
- Section 15(2)(d) of the CGST Act, 2017 does not apply to the present matter. As interest charged by the DCA is not supplying materials to the end customer but it is for the loan given to the customer as well as it is the principal who is supplying the goods to the customers. As well as the interest charged was not for the delayed payment by the customer. So, it comes under item 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
- Services provided by way of extending deposits, loans, or advances and the payment received presented by the interest or discount (other than interest included in credit card services) is not liable to Goods and Services Tax.
- The Authority of Advance Ruling in the present case concluded that the transaction of extension of loan by the Del credere agency (herein refer applicant) to the end customer and the payment is received by way of interest, the same is covered under Entry No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
- It is observed by the AAR, that the extension of short term loan by Del credere Agent to the customer is separate from the supply of goods made by the Principal to the end customer.
- Hence it is exempted from payment of Goods and Services Tax.
