Category: GST

The Delhi High Court has granted an ex parte ad interim injunction restraining Getmohit Cab Private Limited, Shri Bheru Nath Motor Body, and unidentified John Doe entities from manufacturing, deploying, marketing, or advertising buses under the “BHARATBENZ” mark, in a trademark infringement suit filed by Daimler India Commercial Vehicles Pvt Ltd. Justice Jyoti Singh, finding that the plaintiff had established a prima facie case and that irreparable harm would follow if the injunction were withheld, passed a sweeping restraint order covering the use of any mark, logo, label, device, or trade dress deceptively similar to Daimler India’s registered trademarks in relation to buses and allied services.

The suit was triggered by a discovery made around the end of November 2025, when Daimler India came across a video on the social media platform X showing a bus bearing the “BHARATBENZ” mark and logo on its front grille, while the steering wheel carried branding of a different manufacturer — Leyland. The video further revealed that the bus lacked essential safety features including an emergency exit and air suspension. Daimler India, represented by Advocates Pravin Anand, Vaishali Mittal, Siddhant Chamola, and Jitesh P. Gupta, alleged that the defendants were manufacturing and deploying these buses without authorisation, and were promoting and booking them through websites and online platforms where “Bharat Benz” was listed as a bus type — a practice the plaintiff contended was misleading consumers into believing a commercial association with Daimler India.

The plaintiff argued that such unauthorised deployment of identical or deceptively similar marks for identical services was likely to cause public confusion and dilute the distinctiveness of the well-known “BENZ” family of marks. It further contended that the inferior quality of the buses — evidenced by the missing safety features — was actively damaging the reputation and goodwill attached to the BharatBenz brand. The Court accepted these submissions at this stage, noting that the balance of convenience favoured the plaintiff, and restrained the defendants and all persons acting on their behalf from any use of the mark across manufacturing, marketing, sale, supply, deployment, display, and advertising. The matter is next listed for 22 July 2026.

The order is notable not merely as a routine trademark injunction but for the consumer safety dimension that underpins it. The combination of counterfeit branding with demonstrably substandard safety standards — no emergency exit, no air suspension — transforms what might otherwise be a conventional passing-off dispute into a matter with potential regulatory and public safety ramifications. For brand owners in the commercial vehicle segment, the decision reinforces the utility of John Doe injunctions in addressing distributed infringement networks where the full chain of manufacturing, branding, and deployment may span multiple unidentified actors.

The New Delhi Bench of the Goods and Services Tax Appellate Tribunal has closed anti-profiteering proceedings against Samridhi Realty Pvt. Ltd., accepting the Director General of Anti-Profiteering’s closure report after finding that the developer had already passed on input tax credit benefits to homebuyers far exceeding the amount required under Section 171 of the Central Goods and Services Tax Act, 2017. Justice Mayank Kumar Jain and Technical Member Anil Kumar Gupta, disposing of the matter by order dated 2 April 2026, recorded that no contravention of the anti-profiteering provisions could be sustained in circumstances where the developer had demonstrably over-compensated its buyers.

The complaints had been filed by purchasers of flats in the “Samridhi Grand Avenue” project in Greater Noida West, alleging that the developer had failed to pass on additional ITC benefits arising from the transition to the GST regime from 1 July 2017. The proceedings had a layered procedural history — the DGAP conducted a reinvestigation pursuant to the Delhi High Court’s decision in Reckitt Benckiser India Pvt. Ltd. v. Union of India, and upon recalculation found that while the developer had received an additional ITC benefit of 4.19 per cent in the post-GST period, the computed profiteering amount stood at Rs 6.59 crore. Against this figure, Samridhi Realty — represented by Chartered Accountant Ashish Vaish — had already passed on ITC benefits of Rs 16.45 crore to 935 homebuyers, resulting in an excess pass-through of Rs 9.86 crore over and above the statutory requirement.

During the hearing, the developer agreed to pay differential amounts along with interest to the two individual complainants, who acknowledged receipt of the recalculated benefits. No other homebuyer among the 935 recipients raised any objection to the DGAP’s closure report.

The outcome illustrates a relatively uncommon scenario in anti-profiteering jurisprudence — a developer that has not merely complied with the pass-through obligation but substantially exceeded it. For the real estate industry, the decision confirms that where a respondent can demonstrate through the DGAP’s own investigation that benefits passed on exceed the computed profiteering amount, proceedings will be closed without adverse findings, regardless of the initial complaint. It also highlights the practical effect of the Reckitt Benckiser reinvestigation framework, which in this instance produced a result entirely favourable to the developer upon recalculation.

GSTAT Confirms Rs 1.20 Crore Anti-Profiteering Demand Against Ahmedabad Developer for Withholding ITC Benefits from Homebuyers

The GST Appellate Tribunal has upheld a finding that Ahmedabad East Infrastructure LLP failed to pass on input tax credit benefits to homebuyers after the introduction of GST, directing the developer to refund Rs 1,20,72,320 along with interest at 18 per cent from the date the excess amount was collected. Technical Member A. Venu Prasad, sitting on the Principal Bench, confirmed by order dated 2 April 2026 the conclusions reached by the Directorate General of Anti-Profiteering and held the developer in violation of the anti-profiteering mandate under Section 171 of the Central Goods and Services Tax Act, 2017.

The investigation had established that the developer’s input tax credit ratio increased by 1.31 per cent following the transition to the GST regime — a quantifiable benefit that, under Section 171, was required to be passed on to recipients by way of commensurate reduction in prices. The developer, represented by Advocate Chintan Vasa, did not contest the computation and agreed to refund the amount. Praveen Kumar appeared for the applicants.

The Tribunal directed refund with interest at 18 per cent under Rule 133(3)(b) of the CGST Rules, reasoning that the obligation to pass on the benefit crystallises at the time of supply and not at any subsequent point. It further held that penalty under Section 171(3A) was leviable, subject to the statutory proviso that governs its imposition.

The order reinforces the Tribunal’s consistent position that the anti-profiteering mechanism under Section 171 operates as a mandatory pass-through obligation, not a discretionary one, and that even where the respondent does not dispute the computation, interest liability accrues automatically from the date of collection. For the real estate sector — which has generated the bulk of anti-profiteering complaints since 2017 — the ruling serves as a reminder that any post-GST enhancement in ITC ratios must be reflected in pricing contemporaneously with the supply, and that belated compliance after an investigation does not extinguish the interest and penalty consequences.

The Calcutta High Court has sharply criticised GST authorities for insisting that a Kanpur-based sole proprietor appear in person before them in connection with the detention of goods in transit, holding that Section 116 of the Central Goods and Services Tax Act, 2017 expressly permits appearance through an authorised representative, including an advocate, and that no justification existed for overriding that statutory entitlement. Justice Kausik Chanda, disposing of a writ petition filed by Sunshine Enterprises through Advocate Pranit Bag, simultaneously flagged a far graver procedural failing — the authorities had detained goods and a vehicle for over four months without passing any formal order of seizure, a lapse the Court found incompatible with the statutory time frames prescribed under the CGST Act and the rules framed thereunder.

The dispute concerned 480 cartons of pan masala valued at Rs 36.24 lakh, supplied by Sunshine Enterprises to Maa Kali Traders in Howrah. The consignment was accompanied by tax invoices, e-way bills, and transport documents, and was intercepted on 18 December 2025 while in transit. The vehicle and goods were detained on the spot. When the proprietor sought release, the authorities demanded her personal appearance. She responded through her advocate, requesting that representation through counsel be accepted and pressing for release of the detained consignment. On 14 January 2026, the authorities wrote back, citing a report from the Uttar Pradesh GST department which alleged that Sunshine Enterprises did not exist and had been created to avail wrongful input tax credit — a claim on the basis of which they continued to insist on personal appearance. Advocates Nilotpal Chatterjee appeared for the Revenue.

The Court found no merit in the Revenue’s position on either front. On the question of personal appearance, it held that the statutory framework under Section 116 admits of no ambiguity — a person summoned or otherwise required to appear before a GST officer in connection with any proceedings is entitled to do so through an authorised representative, and the authorities had no basis for departing from this express provision. On the detention itself, the Court observed that the goods were perishable in nature and that the authorities ought to have proceeded within the timelines mandated by the statute, rather than allowing the matter to remain in limbo for four months without formalising the detention into a seizure order or initiating proceedings under Section 129.

The Court also addressed the question of ownership for the purposes of Section 129 proceedings, noting a government circular dated 31 December 2018 which provides that where invoices accompany the goods, either the consignor or the consignee is to be treated as the owner. It observed that the invoices reflected Sunshine Enterprises as consignor and Maa Kali Traders as consignee, and that the authorities ought to have determined ownership accordingly. The Court further noted a communication from the consignee requesting that the goods and vehicle not be released without its consent — a factor that needed to be addressed in a hearing with all parties present.

The Court directed the GST officer to fix a hearing on 10 April 2026, permit the petitioner to appear through her advocate, and issue notice to the consignee within 24 hours. It ordered that after granting an opportunity of hearing to all parties, the authorities must pass an order under the Act within 48 hours. It clarified that if the petitioner deposits the amount contemplated under Section 129(1)(a) and such payment is accepted, the goods and vehicle shall be released in accordance with law, subject to the outcome of the proceedings.

The decision carries significance beyond the individual dispute. The insistence on personal appearance — particularly when directed at an out-of-state assessee — operates in practice as a coercive tool that delays proceedings, prolongs detention of goods, and imposes disproportionate compliance costs on small proprietors. By anchoring its reasoning in Section 116 and the government’s own circular, the Calcutta High Court has reinforced that the right to appear through counsel is not a discretionary concession but a statutory entitlement, and that authorities who disregard it risk having their proceedings set aside for procedural impropriety.

A Division Bench of the Telangana High Court has held that tax authorities cannot issue a single composite liability order against a company and its Managing Director under the GST regime and then rely on that very consolidation to foreclose independent appellate remedies for each party. Chief Justice Aparesh Kumar Singh and Justice G.M. Mohiuddin, allowing writ petitions filed by Sugna Metal Limited and its Managing Director — represented by Advocate Akruti Goyal — directed the Revenue to issue two distinct Form GST DRC-07 orders within two weeks, and ruled that the limitation clock for filing appeals would commence only upon issuance of these fresh separate orders.

The proceedings originated from a demand exceeding Rs 2.59 crore confirmed under the Central Goods and Services Tax Act, 2017, encompassing tax, interest, and penalties. The Department had issued a single Order-in-Original and a composite DRC-07 form fastening liability jointly on the company and its Managing Director. The Managing Director’s predicament was acute — he was not even registered under GST, and the absence of an individual liability order meant he had no mechanism to file an independent statutory appeal under Section 107 of the CGST Act. Senior Standing Counsel Dominic Fernandes appeared for the Revenue.

The Bench accepted the Managing Director’s contention that the composite format effectively extinguished his statutory right of appeal. It directed the authorities to first grant the Managing Director a temporary GST identification number, thereby bringing him within the procedural architecture of the statute, and thereafter to bifurcate the existing composite order into two separate DRC-07 forms — one addressed to the company, the other to the Managing Director. The Court was careful to ensure that this remedial direction did not come at the cost of limitation, clarifying that the period for filing appeals would be reckoned only from the date of issuance of the revised separate orders, thereby preserving the appellate window for both parties in full.

The decision addresses a structural vulnerability in GST adjudication practice that has received limited judicial attention. When tax authorities club the liability of a registered entity and an unregistered individual — typically a director or partner made liable under Section 137 or Section 89 of the CGST Act — into a single order, the unregistered individual is procedurally stranded: without a GSTIN, the individual cannot access the common portal to file an appeal, and without a separate order, there is nothing discrete to challenge. The Telangana High Court’s direction to issue a temporary registration number and bifurcate the DRC-07 creates a replicable template for similarly situated directors and partners across the country, and puts adjudicating authorities on notice that composite orders which structurally deny appellate access will not survive judicial scrutiny.

The Delhi High Court has refused to intervene under Article 226 of the Constitution in a challenge to a corrigendum that allegedly transformed the scope of a show cause notice issued under the Central Goods and Services Tax Act, 2017, by grafting an entirely new financial year onto the original demand. A Division Bench comprising Justices Nitin Wasudeo Sambre and Ajay Digpaul held that the question of whether such a corrigendum constituted a legitimate typographical correction or an impermissible expansion of proceedings is inherently a factual inquiry — one that must be resolved through the statutory appellate machinery rather than through the writ court’s certiorari jurisdiction.

The dispute arose from proceedings initiated against Manpar Icon Technologies under Section 74 of the CGST Act, which governs demands in cases of fraud, wilful misstatement, or suppression of facts. The original show cause notice covered Financial Year 2018–19. A corrigendum was subsequently issued that introduced Financial Year 2019–20 into the scope of the notice. The adjudicating authority thereafter passed an order-in-original confirming a tax demand exceeding Rs 42 lakh. Manpar Icon Technologies, represented by Advocates Chinmaya Seth, A.K. Seth, and Palak Mathur, challenged the corrigendum, the show cause notice, and the final order before the High Court, arguing that what the Revenue characterised as a correction was, in substance, the initiation of entirely fresh proceedings for a separate financial year — proceedings that could not be sustained within the limitation framework of Section 74 and could not be dressed up as a rectification under Section 161 of the CGST Act.

The Revenue, represented by Standing Counsel Monica Benjamin with Advocate Nancy Jain, maintained that the corrigendum did nothing more than rectify a typographical error concerning the relevant tax period and introduced no new transaction or liability. The Revenue further pressed the availability of a statutory appeal under Section 107 of the CGST Act as a complete answer to the petitioner’s grievance.

The Bench sided with the procedural objection. It observed that the CGST Act confers the statutory power to issue corrigenda, but the question of whether any particular corrigendum falls within the permissible boundaries of correction or strays into the territory of an impermissible expansion of scope is one that demands a close examination of the underlying factual record — an exercise the Court found incompatible with the limited certiorari jurisdiction available under Article 226. The Court further reasoned that mere disagreement with the conclusions reached by the adjudicating authority does not, standing alone, furnish a basis for bypassing the statutory remedy and invoking the writ court’s extraordinary jurisdiction. It pointed to Section 107 of the CGST Act, read with Rule 109A of the CGST Rules, as the express appellate avenue available to any person aggrieved by an order passed under Section 74, and found no cause to interfere. The Bench was careful to clarify that it had not examined or expressed any view on the merits of Manpar Icon Technologies’ substantive challenge, leaving those questions entirely open for the appellate forum.

The ruling underscores a recurring tension in indirect tax litigation under the GST regime: the boundary between a corrigendum that corrects a clerical error and one that substantively alters the scope of adjudication. For assessees confronted with corrigenda that appear to expand the taxable period, the decision signals that the High Court will not readily step in as a first-instance fact-finding body, even where the expansion is alleged to violate limitation provisions. The practical implication is clear — the statutory appellate route under Section 107, rather than writ jurisdiction, will remain the expected forum for contesting such disputes, unless the assessee can demonstrate that the case falls within one of the recognised exceptions to the alternative remedy doctrine, such as a jurisdictional error apparent on the face of the record or a violation of principles of natural justice that renders the appellate remedy illusory.

In the complex landscape of Goods and Services Tax (GST) compliance, few areas demand as much attention as the issuance of tax invoices. For businesses engaged in providing continuous services spanning months or years, the timing of these invoices is governed by specific provisions under Section 31(5) of the Central Goods and Services Tax (CGST) Act, 2017. This provision contains three distinct sub-clauses that outline different scenarios for invoice issuance, raising important questions about their application: Do service providers have the freedom to choose which sub-clause to apply? Or are these provisions mutually exclusive and determined by contractual terms?

This article examines these questions and provides clarity on the correct application of Section 31(5) for continuous supply of services.

What Constitutes a “Continuous Supply of Services”?

Before delving into invoice timing requirements, it’s essential to understand what qualifies as a “continuous supply of services” under GST law. Section 2(33) of the CGST Act defines this as a service that is:

• Provided continuously or on a recurrent basis
• Under a contract
• For a period exceeding three months
• With periodic payment obligations

Typical examples include Annual Maintenance Contracts (AMCs), long-term software support agreements, rental arrangements extending beyond three months, and telecommunication services.

The Three Sub-clauses of Section 31(5): Understanding Their Distinct Applicability

Section 31(5) provides three different scenarios for determining when to issue a tax invoice for continuous services:

Sub-clause (a): When Due Date is Ascertainable from Contract

The first scenario applies when the contract clearly specifies payment due dates. The provision states: “where the due date of payment is ascertainable from the contract, the invoice shall be issued on or before the due date of payment.”

For example, in a 12-month software maintenance contract with quarterly payments due on the 1st of April, July, October, and January, invoices must be issued on or before these specified dates.

Sub-clause (b): When Due Date is Not Ascertainable from Contract

The second scenario applies when the contract does not specify clear payment due dates. In such cases, “where the due date of payment is not ascertainable from the contract, the invoice shall be issued before or at the time when the supplier of service receives the payment.”

For instance, if a consulting agreement stipulates that payments will be made “based on fund availability” without fixed dates, the consultant must issue invoices before or when they receive payment.

Sub-clause (c): When Payment is Linked to Event Completion

The third scenario applies when payment depends on completing specific events: “where the payment is linked to the completion of an event, the invoice shall be issued on or before the date of completion of that event.”

An example would be a software development contract where 30% payment is due upon completion of “Phase 1: User Interface Design.” The invoice for this portion must be issued on or before the date Phase 1 is completed.

No Arbitrary Choice: Contractual Terms Determine Applicable Sub-clause

A critical question is whether service providers can arbitrarily choose which sub-clause to apply. The analysis of Section 31(5)’s structure and language reveals the answer is no.

Each sub-clause begins with the conditional term “where,” indicating that each provision is designed to apply to a specific and distinct factual scenario defined by the contract’s payment terms. This linguistic structure strongly suggests mutual exclusivity among the sub-clauses.

The conditions within each sub-clause—an ascertainable payment due date, a non-ascertainable due date, or payment linked to event completion—are inherently different. It’s difficult to conceive how a single payment obligation could simultaneously satisfy the distinct conditions of multiple sub-clauses.

Official circulars support this interpretation. For example, CBIC Circular No. 222/16/2024-GST addressing spectrum usage charges treats the Frequency Assignment Letter as a contract. The circular explicitly states that if this document specifies ascertainable payment due dates, Section 31(5)(a) mandatorily applies.

Therefore, the applicable sub-clause is determined by the objective contractual terms agreed between supplier and recipient, not by the service provider’s preference.

A Logical Assessment Process for Determining the Applicable Sub-clause

While Section 31(5) doesn’t explicitly establish a formal hierarchy among its sub-clauses, a logical sequence for their assessment emerges:

1. First, check whether the due date of payment is ascertainable from the contract. If yes, apply sub-clause (a).
2. If not, determine whether payment is linked to the completion of a specific event. If yes, apply sub-clause (c).
3. If neither of these conditions applies, default to sub-clause (b).

This structured approach ensures systematic coverage of all contractual payment possibilities.

Can Multiple Sub-clauses Apply to a Single Invoice?

Given the principle of mutual exclusivity, it’s highly improbable for more than one sub-clause to apply simultaneously to the same component of service covered by a single tax invoice.

However, a complex contract might involve different types of charges that, if invoiced separately, could legitimately fall under different sub-clauses. For example:

• A fixed monthly retainer (Section 31(5)(a))
• A performance bonus upon project phase completion (Section 31(5)(c))
• Ad-hoc charges for additional services without fixed payment dates (Section 31(5)(b))

In such scenarios, different invoices would be issued for different service components, each following its relevant sub-clause. But for a single invoicing event covering a specific supply portion, only one sub-clause can apply.

Practical Implementation and Compliance Steps

To ensure compliance with Section 31(5), service providers should follow these steps:

1. Confirm “Continuous Supply” Status: Verify that the service meets all criteria under Section 2(33).
2. Thoroughly Examine the Contract: Review payment terms to determine which sub-clause applies:
   • Are payment due dates clearly ascertainable? → Apply sub-clause (a)
   • Are payments linked to specific event completions? → Apply sub-clause (c)
   • If neither condition applies → Apply sub-clause (b)
3. Document Your Rationale: Maintain internal records explaining why a particular sub-clause was applied, supported by relevant contract clauses.
4. Configure Accounting Systems: Ensure invoicing systems are set up to generate tax invoices according to the applicable timelines.
5. Handle Advance Payments Separately: Remember that receipt vouchers must be issued for any advance payments, independent of the tax invoice requirements under Section 31(5).

Consequences of Non-Compliance

Incorrect application of Section 31(5) can lead to several adverse outcomes:

1. Interest Liability: Delays in GST payment resulting from incorrect invoice timing can trigger interest charges (typically 18% per annum).
2. Penalties: Non-compliance may attract penalties under various provisions:
   • General penalty up to ₹25,000 under Section 125
   • Penalties for incorrect invoicing or non-issuance of invoices
3. Impact on Recipient’s Input Tax Credit (ITC): Perhaps most significantly, incorrectly issued or delayed invoices can jeopardize the recipient’s ability to claim ITC, potentially straining business relationships.
4. Increased Scrutiny: Persistent non-compliance may flag a business for departmental audits.

Why This Matters: Strategic Implications

The correct application of Section 31(5) carries significant strategic implications:

1. Contract Drafting Considerations: When negotiating continuous service agreements, parties should carefully consider how payment terms are structured, as this directly determines applicable invoicing timelines.
2. Cash Flow Impact: The timing of invoice issuance affects when GST liability arises and must be discharged, impacting cash flow planning.
3. Business Relationship Management: Ensuring timely and compliant invoicing facilitates smooth ITC claims for recipients, strengthening business relationships.
4. Risk Management: Proactive compliance minimizes the risk of penalties, interest, and disputes.

Conclusion

Section 31(5) of the CGST Act provides a structured framework for invoice timing in continuous service arrangements. The analysis leads to several key conclusions:

1. Service providers do not have arbitrary choice among sub-clauses (a), (b), and (c).
2. These sub-clauses are mutually exclusive, each addressing a distinct scenario based on contractual payment terms.
3. The contract is determinative—specific terms regarding payment due dates or event linkages dictate which sub-clause applies.
4. It’s not permissible to apply multiple sub-clauses to a single invoice for a specific supply component.

For businesses engaged in continuous services, implementing robust processes for contract review and invoice timing is essential. This includes thorough contract analysis, clear documentation of applicable provisions, appropriate system configuration, and regular monitoring of regulatory developments.

By embedding these compliance practices into contract management and operational processes, businesses can achieve more than mere technical adherence to GST provisions—they can create strategic advantage through enhanced financial planning, reduced risk exposure, and stronger client relationships.

The complexity of Section 31(5) reflects the diverse commercial arrangements that characterize continuous service supplies. However, with systematic analysis and structured implementation, businesses can navigate these requirements effectively while optimizing their invoicing practices within the legal framework.

Short Answer: Yes!

The implementation of the Goods and Services Tax (GST) in India from July 1, 2017, marked a significant transformation of the country’s indirect tax structure. Banking and financial services, given their complexity and diverse offerings, presented unique challenges within this framework. A recurring point of contention arises when banks reverse charges such as late payment fees or finance charges along with the applicable GST. This analysis explores the legal obligations surrounding GST reversal when banks reverse underlying charges, focusing on the procedures mandated under the Central Goods and Services Tax Act, 2017 (CGST Act).

GST Applicability on Bank Charges

Legal Basis for Taxation

The foundation for levying GST on bank charges stems from the definition of ‘value of supply’ under the CGST Act. Section 15(2)(d) explicitly states that the value of supply includes “interest or late fee or penalty for delayed payment of any consideration for any supply.” When a bank provides a service, additional amounts charged due to the customer’s delay in fulfilling payment obligations are considered part of the value of the underlying banking service and are brought within the scope of GST levy.

Financial services predominantly fall under Service Accounting Code (SAC) 9971. Most ancillary banking services that involve explicit fees attract GST at the standard rate of 18% (levied as 9% CGST + 9% SGST for intra-state supplies or 18% IGST for inter-state supplies). This includes late payment charges, finance charges on credit cards, processing fees, annual fees, and similar levies.

Distinguishing Taxable Charges from Exempt Interest

It’s crucial to differentiate between taxable charges and exempt interest components. Notification No. 12/2017-Central Tax (Rate), dated June 28, 2017, provides an exemption for “services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount.” This exemption covers interest earned by banks on standard loans and advances and interest paid on deposits.

However, this exemption explicitly excludes “interest involved in credit card services.” This exclusion confirms that interest charged on outstanding credit card balances, often referred to as finance charges, is liable to GST at 18%. Furthermore, official FAQs clarify that any additional interest or penal interest charged for default in payment of installments related to a supply which is itself subject to GST, is includible in the value of that supply and hence liable to GST.

The Emergence of ‘Penal Charges’

A significant development occurred following a directive from the Reserve Bank of India (RBI) issued in August 2023. This directive mandated Regulated Entities (REs), including banks, to replace ‘penal interest’ with ‘penal charges’ for non-compliance with material loan terms and conditions. These penal charges are to be levied reasonably and non-discriminatorily on the defaulted amount only and should not be capitalized.

Subsequently, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 245/02/2025-GST, dated January 28, 2025, clarifying that these specific ‘penal charges’ are not subject to GST. The rationale provided is that such charges are akin to damages or penalties for breach of contract terms, rather than constituting consideration for a supply of service.

This creates a critical distinction in GST treatment based on the nature and timing of the charge:

• ‘Late payment fees’, ‘finance charges’ (especially on credit cards), and ‘penal interest’ levied prior to the RBI directive’s implementation generally remain taxable under Section 15(2)(d).
• ‘Penal charges’ levied strictly in accordance with the RBI’s August 2023 guidelines are exempt from GST.

GST Adjustment Mechanism for Reversed Charges

Credit Notes Under Section 34, CGST Act

When a bank reverses a previously levied taxable charge, this action effectively constitutes a reduction in the value of the service originally supplied. The CGST Act provides a specific legal instrument to handle such situations: Credit Notes, as defined under Section 34.

Section 34(1) outlines the circumstances requiring a registered person to issue credit notes:

1. When the taxable value charged exceeds the actual taxable value payable
2. When the tax charged exceeds the actual tax payable
3. When goods supplied are returned
4. When goods or services supplied are found deficient

The reversal of a taxable bank charge clearly falls under conditions (1) and (2). If a late payment fee was charged and later waived, the taxable value and tax originally charged exceed the final amount payable, statutorily triggering the requirement for the bank to issue a credit note under Section 34(1).

Procedural Requirements and Timelines

The bank must declare credit note details in their GST return (Form GSTR-1) for the month of issuance. There is a statutory time limit for declaring these credit notes for adjusting tax liability – no later than the 30th day of November following the end of the financial year in which the original supply was made, or the date of furnishing the relevant annual return (Form GSTR-9), whichever is earlier.

Rule 53(1A) of the CGST Rules, 2017 prescribes the specific particulars that must be contained in a credit note, including supplier and recipient details, unique serial number, date of issue, reference to the corresponding original tax invoice(s), value of supply, rate of tax, and the amount of tax credited.

No tax without transaction

Some banks may assert that “the GST component once charged will not be reversed” despite reversing the associated service fees is contrary to established GST law and is legally untenable. As per Section 34(1) of the CGST Act, 2017, the issuance of a credit note is mandatory when the taxable value of a supply decreases. The use of the word “shall” indicates a statutory obligation, not discretion.

Retaining the GST component after reversing the service charge amounts to collecting tax without an underlying supply, violating the fundamental principle of “no tax without transaction.” It either results in wrongful retention of funds belonging to the government or to the customer and creates inconsistencies in tax accounting.

Under Section 9 of the CGST Act, banks(or any other service provider) act merely as a conduit for tax collection and not as a beneficiary. GST collected on a reversed transaction is not banks revenue. Retaining it amounts to unjust enrichment, and may be in violation of Section 171.

Bnaks position also exposes banks to regulatory risk, including penalties under Section 122 for incorrect invoicing, interest under Section 50 for excess tax collection, and even prosecution under Section 132. Additionally, banks may be subject to consumer claims for systematic overcharging and unfair trade practices.

Further, CBIC Circular No. 137/07/2020-GST makes it clear that changes in consideration must be accompanied by corresponding tax adjustments. Although the circular addresses construction services, the principle applies broadly to all taxable services.

Banks are also legally obligated to issue a proper credit note detailing the original invoice reference, the decreased taxable value, the corresponding tax amount (CGST, SGST/UTGST, or IGST), and the reason—specifically, “Reversal of service charges.”

The Critical Link: Recipient’s Input Tax Credit (ITC) Reversal

A pivotal change was recommended by the 55th GST Council meeting in December 2024 and subsequently proposed for legislative amendment. This amendment to Section 34(2) introduces a critical condition for the supplier’s reduction of output tax liability.

The new requirement stipulates that a supplier (bank) issuing a credit note can reduce their output tax liability only if the recipient of the supply (the customer) has reversed the Input Tax Credit (ITC) that corresponds to the reduction in value specified in the credit note.

The objective of this amendment is to plug a potential revenue leakage loophole. Previously, a supplier could issue a credit note and reduce their tax liability, while the recipient might fail to reverse the corresponding ITC they had claimed based on the original invoice.

This amendment significantly alters the operational dynamics and compliance burden. It places the onus on the bank not only to issue the credit note but also to ensure that the recipient has performed the corresponding ITC reversal before the bank can legitimately reduce its own tax payment. Obtaining such confirmation presents a considerable operational challenge, which may explain banks’ reluctance or delay in reversing the GST component of charges.

Practical Scenarios

Scenario 1: Late Payment Fee Reversed (B2B)

When a business customer (registered under GST) is charged a late payment fee plus GST on their corporate credit card and subsequently gets it reversed:

Bank’s Action:

• Reverse the base charge
• Issue a GST Credit Note for the taxable value reduction and tax reduction
• Inform the business customer about their obligation to reverse the ITC previously claimed
• Obtain confirmation from the business that they have reversed the ITC
• Declare the Credit Note details in the bank’s GSTR-1
• Only after receiving confirmation of ITC reversal, reduce its output tax liability

Customer’s Action:

• Receive the Credit Note
• Reverse the ITC claimed earlier in their GSTR-3B
• Confirm the reversal to the bank

Scenario 2: Finance Charge Reversed (B2C)

When an individual (unregistered customer) is charged finance charges plus GST on their personal credit card and gets it reversed:

Bank’s Action:

• Reverse the base charge
• Issue a financial credit note documenting the reversal of the charge plus GST
• Declare the details of this reduction in their GSTR-1
• Reduce its output tax liability in its GSTR-3B

Customer’s Action:

• The customer, being unregistered, cannot claim ITC. Therefore, the requirement for ITC reversal does not apply
• The customer simply benefits from the total reversal

Impact of Amended Section 34(2) on Compliance

The requirement for banks to ensure recipient ITC reversal before adjusting their own liability presents significant practical hurdles:

1. Communication & Coordination: Banks need robust systems to communicate the issuance of credit notes and the recipient’s obligation to reverse ITC.
2. Verification: Establishing a reliable mechanism to verify that the recipient has actually reversed the ITC is difficult. Relying solely on customer confirmation might be risky from an audit perspective.
3. Timelines: Delays in recipient confirmation could push the bank beyond the November 30th deadline for adjusting its tax liability, leading to a permanent loss of the tax amount for the bank.
4. Disputes: If a customer disputes the need to reverse ITC or fails to do so, the bank is caught in the middle, unable to reduce its liability despite having reversed the charge.

This increased compliance burden might lead banks to be more cautious or slower in processing GST reversals accompanying charge reversals, potentially explaining observed delays in the system.

Official Clarifications and Jurisprudence

While specific circulars addressing the reversal of general bank charges seem scarce, the foundational principles are well-established:

• Taxability of Charges: FAQs and rate notifications confirm the taxability of late fees and credit card interest under SAC 9971 at 18%.
• Credit Note Mechanism: Section 34 and associated rules provide the general framework, with the recent amendment tightening the link to recipient ITC reversal.
• Penal Charges Exemption: Circular No. 245/02/2025-GST clarifies the exemption for specific penal charges mandated by RBI, distinguishing them from taxable late fees/interest.

Advance Rulings consistently uphold the taxability of ancillary bank charges. For instance:

• Re: Bajaj Finance Ltd. (Maharashtra AAR): Confirmed GST applicability on various penal and additional interest charges levied on customers for delayed EMI payments.
• Re: Cholamandalam Investment and Finance Company Ltd. (Tamil Nadu AAR): Held that additional/penal interest on delayed loan installments is part of the value of supply and taxable.

Conclusion

When banks reverse late payment charges or finance charges that were originally subject to GST, they are legally obligated under Section 34 of the CGST Act to also reverse the GST component collected on those charges by issuing a GST Credit Note to the customer.

However, the bank’s ability to reduce its own tax payment to the government based on this credit note is now contingent upon the registered customer reversing the corresponding Input Tax Credit. This recent amendment introduces a procedural complexity that may cause delays or require active participation from the customer (in B2B cases). For unregistered (B2C) customers, the bank can directly adjust its liability after issuing the credit note and reporting it.

Despite practical difficulties, the legal obligation under Section 34 remains. Any systemic refusal by banks to reverse GST alongside the base charge would likely be contrary to Section 34 and potentially challengeable. The operational difficulty introduced by the amended Section 34(2) may explain practical delays but does not extinguish the fundamental legal obligation.

Recommendations

For Banks:

• Implement clear internal procedures for issuing GST Credit Notes whenever taxable charges are reversed
• Develop robust communication channels to inform B2B customers about issued Credit Notes
• Explore mechanisms to obtain confirmation of ITC reversal
• Ensure timely reporting of Credit Notes in GSTR-1
• Clearly differentiate between taxable charges and exempt charges

For Customers (Businesses):

• Be aware that if a bank reverses a charge on which you claimed ITC, you are obligated to reverse that ITC
• Expect to receive a GST Credit Note for reversed taxable charges
• Cooperate with the bank by confirming ITC reversal promptly
• Escalate matters if a bank refuses to issue a GST Credit Note for the tax component

For Policymakers (GST Council/CBIC):

• Consider issuing further clarifications addressing the operational challenges arising from the amended Section 34(2)
• Enhance GSTN portal functionalities to facilitate easier matching and confirmation of credit notes and corresponding ITC reversals

References

1. Central Goods and Services Tax Act, 2017, Section 15.
2. Notification No. 12/2017-Central Tax (Rate), dated June 28, 2017.
3. CBIC, “FAQ on Banking, Insurance and Stock Brokers Sector.”
4. ClearTax, “GST on Banking Sector: Impact & Important Provisions.”
5. BankBazaar, “GST on banking and financial services: Applicability, rates and more.”
6. Masters India, “Impact of GST on Banking Sector.”
7. Notification No. 11/2017-Central Tax (Rate), dated June 28, 2017.
8. Bajaj Finserv Markets, “GST on Credit Card Transactions: Fees, Charges, Benefits, and More.”
9. CBIC, “FAQ on Financial Services Sector.”
10. SAG Infotech, “GST On Banking Services: Latest News and Impact.”
11. Financial Express, “GST impact on banking services: Here’s the list of transactions to become costlier from July 1,” June 2017.
12. RBI Circular: DOR.STR.REC.50/21.04.048/2023-24, dated August 18, 2023 – Fair Lending Practice – Penal Charges in Loan Accounts.
13. CBIC Circular No. 245/02/2025-GST, dated January 28, 2025.
14. Press Release: Recommendations of 55th GST Council Meeting, dated December 21, 2024.
15. Business Standard, “GST Council decides penal charges by banks won’t attract GST,” Dec 2024/Jan 2025.
16. CBIC Circular No. 178/10/2022-GST, dated August 3, 2022.
17. ICICI Bank, “GST on Loan: Processing Fee, Interest Rates, EMI.”
18. Central Goods and Services Tax Act, 2017, Section 34.
19. TaxGuru, “Credit Note & Debit Note under GST – Section 34.”
20. Central Goods and Services Tax Rules, 2017, Rule 53.
21. Finance Act, 2022 amendments to Section 34, CGST Act.
22. GST AAR Maharashtra, In Re: Bajaj Finance Ltd., Order No. GST-ARA-23/2018-19/B-69, dated July 26, 2018.
23. GST AAR Tamil Nadu, In Re: Cholamandalam Investment and Finance Company Ltd., Order No. 12/AAR/2019, dated June 28, 2019.