The Authority for Advance Rulings (AAR), Maharashtra in the case of M/S. RESERVE BANK OF INDIA vide Order No. GST-ARA-117 of 2022-23/2024-25/B-53 dated 31.07.2024, has ruled that penalties, late fees, penal interest, and fines levied by RBI for both contravention of laws and breach of contractual agreements are not subject to GST. This decision aligns with the clarifications provided in the CBIC Circular No. 178/10/2022-GST, ensuring that such payments are not considered as consideration for any supply.

Facts of the Case:- Reserve Bank of India (‘RBI’ or ‘the Applicant’) is fully owned by the Government of India. RBI is the central bank of the country and provides currency management services to the public. It also acts as the regulator of the banking and financial system and performs the role of monetary policy authority. RBI imposes various penalties and fines under different acts and regulations, such as the RBI Act, Government Securities Act, Banking Regulation Act, FEMA, SARFAESI Act, CIC Act, Payment and Settlement Systems Act, and Factoring Regulation Act. These penalties and fines are primarily punitive in nature and are intended to enforce compliance with legal and regulatory provisions. 

Further, RBI engages in contracts with third-party vendors for various services, including maintenance contracts. Under these contracts, penalties are levied for non-performance or under-performance, such as downtime penalties for equipment malfunction. These penalties are compensatory in nature and are linked to the non-fulfillment of contractual obligations.

Issue:-  The question raised by the RBI pertain to the applicability of GST on certain penalties and fines that RBI imposes under two distinct categories:

Category A: Penalties, late fees/penal interest, and fines levied by RBI for contravention or violation of provisions of law.

Category B: Penalties levied by RBI for non-performance or under-performance under contractual agreements with third-party vendors.

Contentions:  The Applicant referenced the CBIC Circular No. 178/10/2022-GST, which clarified that GST is not applicable on penalties imposed for violation of laws. Penalties, late fees, and fines levied by RBI are similar to those imposed under other acts such as the CGST Act and the Income Tax Act. These penalties are meant to inculcate discipline among the regulated entities and cannot be considered as consideration for any supply.

Rulings:-  The AAR observed and ruled as under:

Category A: Penalties for Violation of Law: The authority concluded that penalties levied by RBI for contravention or violation of laws do not constitute a supply of service under GST. Therefore, No GST is applicable on penalties, late fees, and fines levied and collected by RBI for contravention or violation of provisions of law.

Category B: Penalties for Non-performance or Under-performance as per Contractual Agreements: The authority agreed with the submissions, stating that penalties for non-performance or under-performance as per contractual agreements are in the nature of liquidated damages. These penalties compensate for injury, loss, or damage due to breach of contract and are not consideration for any independent activity. Therefore, No GST is applicable on penalties for non-performance or under-performance as per contractual agreements with third-party vendors.