Mumbai: The Goods and Services Tax (GST) department has initiated a preliminary inquiry against banks and non-banking finance companies (NBFCs) to ascertain whether the lenders have evaded any service tax in the fast-growing co-lending business, said people with knowledge of the matter.
In the past one month, the department has sent multiple queries to more than a dozen banks and is likely to follow up with questions to NBFCs on the co-lending facility, they said.
The department is seeking to determine whether co-lending comes under the ambit of taxation and loopholes, if any, are being manipulated to benefit the lenders. The inquiries are at a nascent stage and the department is still figuring out whether there is a case prima facie, the people said.
“Various GST commissionerates across the country and the Directorate General of GST Intelligence have written to almost all the banks and are in the process of writing to the NBFCs who are in the co-lending arrangement if it attracts GST. The probe is at a preliminary stage and the data is being analysed,” said one of the persons, who did not wish to be identified.
Under a co-lending partnership, a bank and an NBFC or a fintech company come together to offer loans to small borrowers jointly. NBFCs which have more flexibility to reach customers in a particular segment usually source these loans for banks and help with the risk assessment according to the banks’ rules.
The Reserve Bank of India’s co-lending framework released in November 2020 provides for collaboration between banks and NBFCs to jointly fund credit disbursals. Under this partnership, a bank can use its low-cost funds to lend to small and micro enterprises through the sourcing and service expertise of an NBFC. Under the co-lending model, NBFCs are required to retain a minimum of 20% share of the individual loans on their books, with the balance being held by banks.
“The initial information that led to the commencement of the inquiries was that there could be some faulty practice in the arrangement, the way it was in the case of the insurance firms doling out commissions to their agents through fake invoices. However, so far in the scrutiny, the department hasn’t come across such massive irregularities. Having said that, some banks have been approached for certain transactions,” said the person.
Officials are still determining whether there is an exchange of fees which can be taxed.
“Since it is the NBFC that sources loans and the majority of them are parked in banks, the question GST authorities are asking is whether this transfer of loans is in exchange for a fee which should be taxed. And if there is no fee exchanged, then is it being masked as interest income by NBFCs?” a senior NBFC executive said on condition of anonymity.
The department has sought information, including the contracts, audit filings, the loans offered, customer details and other data from these institutions, said people familiar with the matter.
“Since the model allows larger entities to lend to customers in wider geographies and give smaller entities access to funds at a lower cost, the data is being studied to find out if there are any discrepancies in the financial transactions between the two and those mentioned in the contract,” said another person aware of the matter. “Audits are underway to ascertain how exactly the arrangement is spelt out and if the GST liability lies on either or both of them.”
The co-lending model has seen a surge and banks flush with funds are increasingly tapping NBFCs and fintech companies to find customers to lend to. For banks, it means access to new customers while for NBFCs it spells cheaper funds and also a share of the loan book.
Both small and big banks have built partnerships under this model. The country’s largest bank, State Bank of India has co-lending partnerships with more than half a dozen financial institutions, including Vedika Credit Capital, Save Microfinance, Paisalo Digital, U GRO Capital, Capri Global Capital and Adani Capital.
