No GST on fines, penalties, late fees collected by RBI, says Maha AAR

Reserve Bank of India will not have to pay Goods & Services Tax (GST) on fines, penalty collected from its regulated institutions, Maharashtra’s Authority for Advance Rulings (MAAR) has said.

RBI, moved to MAAR to get advance rulings on two questions – first, whether the penalties, late fee/penal interest, find of the nature, levied and collected for contravention or violation of law are taxable under GST and second, whether the penalty of the nature for non-performance or under performance as per contractual agreement by the RBI with the third-party vendors are taxable under GST.

The central bank drew attention to a 2017 circular, where it was said: “penalties imposed for violation of laws cannot be regarded as consideration charged by the government or a local authority for tolerating violence of laws.”

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Further it was said that laws are not framed for tolerating their violation. They stipulate penalty not for tolerating violation but for not tolerating, penalising and deterring such violations.

“There is no agreement between the government and the violator specifying that violation would be allowed or permitted against payment of fine or penalty. There cannot be such an agreement as violation of law is never a lawful object or consideration,” the circular mentioned.

RBI submitted that the stance of CBIC in clear and based on that it can be said that fine levied by RBI are similar to the penalties, late fees/penal interest, fine levied under various acts such as GST Act or Income Tax Act. RBI, being a statutory body administering multiple acts, levies the penalties, late fees/penal interest, fine arising out of such legal Statutes.

Consequently, “the penalties are akin to penalties arising out of other such acts.” Hence, such penalties levied by RBI cannot be any stretch of imagination be regarded as consideration or being collected towards any outward supply, it said.

“The sole objective for levy of penalties, late fees/penal interest, fine is to inculcate discipline amongst the Regulatees as it acts as a deterrent for them,” RBI emphasised.

In its submission, jurisdictional officer said that the payment received in the form of penalties, late fees/penal interest, fine of the nature levied and collected by RBI, for contraventions or violation of provisions of law or penalty of the nature for non-performance or under performance as per contractual agreement by RBI with third party vendors are not taxable as such payment do not constitute consideration for supply.

After hearing all the arguments and examining all the facts presented, AAR said that penalty etc by RBI for contravention or violation of various laws, it administers, are for the purpose of maintain disciple and deterrence in the regulate banks, non-banking financial institutes and other institutes.

“These activities are not in the nature of consideration for an activity and hence would not constitute a supply of service,” it said in a recent ruling.

Also, penalties in nature of liquidated damage are levied by RBI on third party vendors for non-performance or under performance as per contract. These activities are also not a supply. Accordingly, such an act will not attar GST.

Ruling by AAR is applicable only on the applicant and the jurisdictional officer. However, this can be referred in similar matter.

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