The Central Board of Indirect Taxes and Customs (CBIC) has said that Goods and Services Tax (GST) will not be applicable on penal charges levied by banks and non-banking financial companies (NBFCs). This clarification, issued through a circular, resolves the issue of whether such charges, typically applied for non-compliance with loan terms, are subject to GST.
The CBIC stated that penal charges, which are imposed by regulated entities under the guidance of the Reserve Bank of India (RBI), are essentially penalties for breaching contractual terms and therefore do not attract GST. This decision aligns with the recommendations of the 55th GST Council, which confirmed that no GST is payable on penal charges arising from non-compliance with material terms and conditions of loan agreements.
The clarification follows the RBI’s directive issued in August 2023, which recommended that banks and NBFCs replace the term “penal interest” with “penal charges” to enhance transparency and communication between lenders and borrowers. The Ministry of Finance’s clarification is seen as a significant step in eliminating ambiguity regarding the taxability of such charges, thus ensuring compliance with RBI directives while preventing additional financial burdens on regulated entities and borrowers.
GST on payment aggregators
In a related matter, the CBIC also addressed the issue of GST applicability to payment aggregators. It clarified that GST exemption applies to payments of up to Rs 2,000 made through credit, debit, or charge cards, facilitated by payment aggregators on online platforms.
Payment aggregators, which serve as intermediaries between e-commerce merchants and customers, are regulated by the RBI and are defined as “acquiring banks” under the GST framework. The exemption is limited to the settlement of amounts through payment aggregators and does not extend to services provided by payment gateways, which handle the technology infrastructure for online transactions.
This move is expected to streamline the tax framework for both financial institutions and payment platforms, fostering a more predictable environment for businesses and ensuring greater tax certainty in the sector.>