There has been a lot of buzz with regard to applicability of GST notional interest. A recent Karnataka AAR in the case of M/s Midcon Polymers Pvt. Ltd. has been issued which discussed extensively in this regard and answered the question- “Whether notional interest on refundable security deposit would form part of value of supply?”
Let us first understand the concept of notional interest being discussed in the AAR. In a case where a house is given on rent, it is an industry practice to make a deposit to the landlord. The interest earned on this deposit is notional interest. The deposit is generally collected as a guarantee for potential damages to the property. On occurrence of such event, the required amount is recognized by the landlord.
Normally, the amount deposited is the value of the rent of a couple of months. But, it has often been observed in cases where the deposit made is of a sizable amount, there is a direct and corresponding reduction in the monthly rent.
Section 15 of CGST Act, 2017 speaks about valuation of a transaction; here is an extract of it for quick reference-
- The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
Reading section 15(1) in the context of the security deposit and notional interest, it is important to understand if the deposit made and the notional interest forms a part of the “…price actually paid or payable…”
The security deposit so collected by the applicant shall not be recognized as an income by the landlord unless he applies the deposit as consideration for the supply as per the proviso to Section 2(31)(b) of the CGST Act, 2017.
The monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government: Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;
In the given case the security deposit is an interest free refundable deposit which is returned to the tenant upon expiration of the lease period and hence shall not be considered as consideration. However, at the expiry of the lease tenure, if the any part of the deposit is not paid back to the tenant since the landlord retained the amount partially or in full, as a charge against damages, then the amount not refunded will get added to the value of supply and become liable to GST.
The judgment of Hon’ble Supreme Court in the case of Commissioner v. I.S.P.L. Industries Ltd. — 2003 (154) E.L.T. 3 (S.C.) discussed with respect to notional interest and it was held that notional interest on advances taken cannot be added to the assessable value of the goods cleared, unless there is a clear nexus showing that the interest free deposit taken has influenced the price. So the underlying condition that lays here is to check if the notional interest influences the monthly rent being paid by the tenant, which is in turn influencing the value of supply. If so, notional interest would become a part of the transaction value and GST would be levied on the total amount i.e., rent plus notional interest.
The monthly rent of a premise is Rs. 1,00,000/- and the owner collects Rs. 10,00,000/- as a refundable deposit. After the tenure mentioned in the rental agreement, the tenant vacates the premise and the owner pays Rs. 9,00,000/-. The amount of Rs. 1,00,000/- would become a part of consideration.
Further, if the owner collects a security deposit of Rs. 50,00,000/- and charges Rs. 50,000/- as the rent, then the amount so deposited would become a part of the value of supply and GST on the same would be charged.
Although the decision does not lay down a prescription on how to determine whether the value of deposit influences the value of supply, the AAR when analyzed with the general practice prevalent in the industry may help in concluding the value of supply and GST applicability on case to case basis.
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