Clear understanding of GST on Interest Income of Individual

Under the GST Regime, assessees are required to obtain registration under the GST Act based on their aggregate turnover. All taxpayers (suppliers of goods and services) are granted a threshold exemption. If the total turnover exceeds this threshold limit, registration under GST is mandatory.  So, let us discuss the GST on interest income of individuals and inclusion in aggregate turnover.

Concept of Interest Income

Interest income is the amount you earn from various financial products (FDs, PPF, Government Bonds, etc.), accounts, and investments. It can be earned when you lend your money to another entity, deposit your funds with a bank or financial institution, or even invest your money in certain programs. Interest income is usually paid at a set interest rate. In other words, it is generally guaranteed. Another key feature of interest income is that it is most often paid periodically. So you can earn interest monthly, quarterly, semi-annually, or annually.

Is interest income considered for GST Regime?

Interest income was specifically assessed within the framework of exempted services according to Entry 27(a) of notification No. 12/2017 and Entry 28(a) of notification No. 9/2017, which refers to services in the form of providing deposits, loans, or advances in the case of consideration presented in the form of interest. Such services are therefore exempt from paying GST and the individual does not need to charge GST on the activity of providing services by providing deposits, loans, or advances if the consideration is interest.

From the above Notification, we know that interest income has been exempted from the purview of GST and therefore a person who has only interest income by way of giving deposits, loans or borrowings or interest income received from PPF or savings bank account need not register under GST.

What are aggregate turnover and its inclusion?

Under the GST Act, “aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is paid by a person on a reverse charge basis), exempt supplies, exports of goods or services, or both, and interstate supplies of the same by Permanent Account Number to be calculated for All India but exclusive of Central Tax, State Tax, Union Territory Tax, Integrated Tax, and Cess.

The aggregate turnover calculated for the entire financial year from April of the year to March of the following year is called the annual aggregate turnover. In other words, it is the total turnover calculated at the PAN level (all GSTINs combined) which is the sum of the following:

• Taxable sales value
• Exempt sale value
• Export of goods and services
• Interstate supplies by a company to a sister concern under the same PAN or interstate transfer of shares or supplies between different persons under the same PAN.

However, the above amount does not include tax components like Central Tax, State Tax, Union Territory Tax, Integrated Tax, and Cess. Furthermore, the taxable value does not include those purchases where a person is obliged to pay tax as part of the reverse charge. Please note that sales that are subject to the reverse charge must continue to form part of the taxable transactions in the aggregate turnover.

Importance of turnover in the State

State turnover differs from the definition of aggregate turnover. It refers to the aggregate value of all taxable and non-taxable supplies, including exempt supplies and exports of goods and/or services made within the state by a taxable person and interstate supplies of goods and/or services made from a state by a specified taxable person without taxes, if they are charged under the CGST Act, SGST Act, and IGST Act, as the case may be.

In other words, the turnover for a particular GSTIN at the state level including all inter-state supplies made under that GSTIN.

Test to determine the taxable Income

In GST ‘supply’, as defined in section 7 of the CGST Act, 2017 is to be treated as a chargeable supply for charging GST. There is an obligation to pay tax at the very moment of delivery of goods or services. 

Thus, determining whether a transaction falls within the meaning of supply or not is important for deciding the applicability of GST. Accordingly, supply includes sale, transfer, exchange, barter, license, hire, lease, and disposal. 

If a person carries out any of these transactions in the course of or furtherance of a business for consideration, it will be treated as a supply under GST. The following tests are necessary to fall under the category of taxable: 

•  The supply is made for consideration and 
•  The supply is made as part of business support.

Notification No. 12/2017-Central Tax (Rate) 

Services where Central Tax on Intra-State supply and Integrated Tax on Inter-state supply are exempted

Exemption of supply of services under the CGST Act G.S.R 691(E).- In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), when the Central Government is satisfied that it is necessary for the public interest to do so on the recommendation of the GST Council, hereby exempts from tax the domestic supply of services of the description as specified from so much of the Central Tax as is levied thereon under sub-section (1) of section 9 of the said Act, as much exceeds the said tax calculated according to the rate specified in the corresponding item in the table, as lists the services exempted from payment of central tax on domestic supplies and integrated taxes on interstate supplies.

Under notification No. 9/2017- Integrated Tax Rate, where the central government is satisfied that the necessity of public interest exempts inter-state supply of services. Entry 27(a) of notification No. 12/2017 and Entry 28(a) of notification No. 9/2017 refer to services in the form of providing deposits, credits, or loans if the consideration is in the form of interest. Interest income services are subject to the Notice above. Therefore, such services are exempt from paying GST and the individual does not need to charge GST on the activity of providing services by providing deposits, loans, or advances if the consideration is interest.

Opinion of Judiciary

Recently the issue came up before the Authority for Advance Ruling (AAR), Gujarat in Re: Shree Sawai Manoharlal Rathi (2020), AAR held that the applicant is required to aggregate the value of exempt interest income earned by extending deposits in PPF & bank savings accounts and loans and advances to his family/friends along with the value of taxable performance i.e. “lease of immovable property” to compute the limit of Rs.20 lakh for obtaining registration under the CGST Act, 2017. 

When deciding whether interest income will be included in the calculation of the registration threshold, the applicant is obliged to take into account both the value of the taxable supply, i.e. the rent on immovable estate, and the exempt supply provided in the form of the provision of deposits, advances or loans on which the interest income earned, to arrive at the ‘aggregate turnover’ for determining the threshold value to obtain registration under the CGST Act, 2017.

Points for Consideration

Let us see in a nutshell that all we have discussed above-

• Interest income is considered an exempt service as it does not come under the very definition of supply as it is not against any consideration even in the course or furtherance of business.
• It falls under the definition of exempt supply as defined in Section 2(47) of the CGST Act, 2017, and thus if a person has only interest income and no other activity with goods or services which come under taxable goods or services other than the interest the income is exempt from GST and is not required to be registered under GST.
• However, if apart from the interest income, the person is engaged in other business of goods or services which are taxable under GST, but if these services are taxable, though, below the threshold limit, the exempt interest income will also be considered and added while determining the registration under the CGST Act, 2017.

So you are required to take the GST number in case your business or profession is even Rs 1 and your interest income is more than Rs 20 lakhs.

Sum Up

The GST valuation guidelines further provide that the transaction price is the taxable value when the price is the sole supply factor. Payment and supply should be inextricably linked. Payments made towards an interest-free security deposit or loan are not considered consideration until they are used against the value of the supply, provided there is no direct relationship between the payment and the delivery of original goods or services. 

However, if the transaction price is influenced by the interest-free security/loan, a link between the interest-free safety and the value of supply may be formed. In such a circumstance, the cost of notional interest may be subject to GST.

Through its trained team, Legal Window offers you with a high level of satisfaction and fast delivery of GST Registration Certificate, GST Return, and other GST-related services, as well as better dealing with government rules. For GST-related and GST-compliance services, please contact our team at 072407-51000 or admin@legalwindow.in.