Whether late payment fees attract GST depends on local tax laws, with many jurisdictions treating them as part of the taxable supply, while others exempt them as financial, interest-based charges. Generally, if the fee is deemed an increase in the cost of goods/services, GST applies.
1. Late payment fees are part of the main supply (like electricity bills, telecom services, or property transactions). 2. GST applies to these charges at the same rate as the main product/service.
Late payment fees being subject to GST is consistent with a broad-based tax. In this respect, it is important to differentiate between late payment fees, which can be seen as an increase in the consideration of the underlying goods and services, and default or penalty interest, which is an exempt financial service.
Do not charge the GST/HST on late-payment surcharges. GST/HST is payable only on the original invoiced amount.
Late payment and finance charges (monthly interest) are exempt from GST. Are cash advance fees subject to GST? No, they are exempt from GST.
Where the late payment penalty is consideration for a financial supply (for example, a supply of an interest in a credit arrangement), there is no need for the supplier to account for GST for that supply. A charge for late payment penalty that is consideration for a financial supply is not an adjustment event.
Penalty interest payments are an input taxed supply under section 40-5 of A New Tax System (Goods and Services Tax) Act 1999. Therefore, it is not subject to GST and there is no entitlement to an input tax credit for the things that are acquired to make the financial supply.
GST Late Fee Structure in India
This fee motivates prompt compliance. Here are the key elements of the GST late fee structure: Daily Late Fee: A late fee of ₹50 per day is paid on Central GST (CGST) and State GST (SGST). The cumulative amount of the late fee is ₹100/day of CGST and SGST combined.
Adding Late Payment Interest
Add interest to the the gross amount of the debt overdue, including VAT. However you can't charge VAT on the interest added.
It has been clarified that the interest as well as the penal interest charged in relation to the supply of goods and services shall be included the value of goods and services and will be liable to GST.
2.5 Thus, as recommended by the 55th GST Council, it is hereby clarified that no GST is payable on the penal charges levied by Regulated Entities, in compliance with RBI directions dated 18.08. 2023, for non-compliance with material terms and conditions of loan contract by the borrower.
If your GST liability is ₹50,000 and payment is delayed by 20 days: Interest = ₹50,000 × 18% × 20 ÷ 365 = ₹493.
A simple example late fee phrase could be:
Please be advised that we will charge 1% interest per month on late invoices.” If a customer is late paying an invoice, you can then follow up with a late fee letter. The late fee letter should be polite, accurate, informative, and based on the terms in the original invoice.
GST – Cash or Accrual
Those on an accrual basis will pay GST on their outstanding invoices when they lodge their BAS for the period when the invoice was raised. Those on a cash basis will pay the GST when they lodge their BAS for the period that they get paid for the invoice.
VAT on Late Payment Charges
With regards to VAT and late payment charges, in most cases, as no supply has been made, late payment compensation and late payment interest are considered to be outside the scope of VAT.
A late payment fee is an extra charge a customer needs to pay when they don't pay a bill by the due date. It's typically 1% to 2% of the past-due invoice amount. If you offer customer financing, you've likely found yourself in a situation that no business owner wants to deal with—a past-due invoice.
Interest never attracts VAT - it does not matter if you are a Financial Service Provider as defined. The essence of VAT is on the end user consuming goods and services. Interest is not a service or good being supplied, but a penalty for late payment and thus does not qualify for VAT to be charged.
Send a Revised Invoice
If your client fails to pay, you can start charging late fees. After 30 days, send a revised invoice that includes your late fees for the month. Include a note in your accompanying email acknowledging this is a second notice and that the payment is now 30 days overdue.
10,000/-, in case of filing the return Form GSTR-7, after due date. late fee is capped at Rs 2,000/-, in case of delay in filing of Form GSTR-7, as per the changes in the Act. These changes in late fee amount would be applicable for returns for the tax period of June, 2021, onwards.
Recording Journal Vouchers for Interest, Penalty, Late Fee and Other Dues in GST
Common BAS Excluded items include wages, super, bank transfers, owner drawings, income tax payments, fines, donations, and certain government charges. Use “BAS Excluded” in Xero for genuinely out-of-scope items, and use GST or GST-free codes for reportable sales and purchases.
fees you pay that are associated with your bank like ATM fees, monthly account fees, or interest on your loans and credit cards do not include GST.
You can charge interest and compensation on any invoices which have been paid late or have not been paid within your agreed payment terms.