The contentious issue of levying 18% goods and services tax (GST) on services provided by non-bank finance companies (NBFCs) to banks in co-lending arrangements may be discussed in the two-day conclave of public sector banks (PSBs) organised by the department of financial services from Friday.
Currently, NBFCs largely source loan proposals in co-lending with banks. However, no GST is being paid on the service charges, as NBFCs argue that extra interest earned by them in such cases is “income.”
Core of the co-lending dispute
Typically, in co-lending arrangements (CLAs), sourcing NBFCs finance 20% of the loan amount to the customer, while banks finance 80%.
The interest from the co-lending business is shared in a predefined ratio. For instance, if a co-lender charges a blended rate of interest of 16% to the customer, with banks entitled to receive 10% on their share, the remaining 6% received from the customer on the bank’s share of the loan is retained by the sourcing NBFC. The NBFC is also entitled to receive the interest component at the blended rate of interest on its share in the loan.
The Directorate General of GST Intelligence (DGGI) has been investigating banks and NBFCs to determine whether there has been any GST evasion in the co-lending business model adopted by these entities.
Policy ambiguity and industry-wide impact
The issue assumes importance at a time when co-lending is given a policy boost by the Reserve Bank of India. Co-lending assets under management (AUM) of NBFCs is believed to have crossed Rs 1 lakh crore. The model, introduced six years ago, was seen to grow at a robust rate of 35-40% annually.
The proposal to clarify the levy of GST on service charges in co-lending activities was not taken up in the GST Council meeting on September 3, as the Council recommended deferring the issue for further examination by its Fitment Committee.
The department of revenue had asked Finance Industry Development Council (FIDC), a representative body of the NBFCs, to provide a proposal regarding the minimum value of service charges in CLAs at the earliest, sources said.
FIDC had earlier said that NBFCs charge a higher rate of interest purely in the nature of interest on loan and contended that this is not a consideration for any service, and so, should not be subjected to the GST. Interest on loans is exempt from GST.
FIDC, Indian Banks Association, department of financial services and department of revenues held parleys on the matter recently.