No GST on penal charges levied by banks, NBFCs and other regulated entities on loans, clarifies CBIC
The government has stated that no Goods and Services Tax (GST) is required to be paid on penal charges on loans levied by RBI regulated entities like banks, NBFCs etc. The Central Board of Indirect Taxes and Customs (CBIC) in its notification dated 28 January 2025 has clarified that penal charges are something which is levied by banks, NBFCs, etc to bring a sense of discipline among customers. The technical term for this type of charge is ‘liquidated damages’. For those unfamiliar with this term, liquidated damages means a preset amount of money that is paid by the defaulting party in the event of breach of any contract with another party.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
Budget with ET
Budget must find a fix for a crisis before it's too late
Is India about to add more 'castes' in one day?
Will Sitharaman give middle-class consumers some respite from price pain?
What clarification did the govt give about charging GST on penal charges of loans
CBIC said in a clarification circular dated January 28, 2025, “...certain payments such as liquidated damages for breach of contract are not a consideration for tolerating an act or situation. They are rather amounts recovered to deter such acts; such amounts are for preventing breach of contract or non-performance and are thus mere ‘events’ in a contract. It has been further clarified that the essence of a contract is its ‘performance’ and not its ‘breach’, meaning thereby that parties enter into a contract for execution and not for its breach.”“Penal charges levied by REs, in compliance with RBI directions dated 18.08.2023, are essentially in the nature of charges for breach of terms of contract and hence, fall within the ambit of the above clarification. It is hereby clarified that no GST is payable on the penal charges levied by Regulated Entities, in compliance with RBI directions dated 18.08.2023, for non-compliance with material terms and conditions of loan contract by the borrower.”
How does this new GST clarification help loan consumers
Chartered Accountant Bimal Jain, founder, A2Z Taxcorp LLP says this clarification has provided some relief to borrowers who defaulted on their loan contract with banks, NBFCs, others. “Whenever a customer defaults the regulated entities levy penal charges on the customer. Earlier some banks, NBFCs, were charging GST on such charges, while some were not. Those who did not charge GST on penal charges were issued show cause notices (SCNs) by the GST department. Now after this clarification no bank, NBFC, or others will charge GST on penal charges on loan.”Brijesh Kothary, Partner, Khaitan & Co agrees with Jain and adds: “Certain banks and financial institutions that were taking a conservative position of charging GST on penal charges collected from the borrowers with an intent to insulate themselves from any unforeseen tax demands can now take a clear tax position of not charging GST on penal charges collected from the borrowers, thereby reducing the overall borrowing cost.”
Artificial Intelligence(AI)
Java Programming with ChatGPT: Learn using Generative AI
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Basics of Generative AI: Unveiling Tomorrows Innovations
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Generative AI for Dynamic Java Web Applications with ChatGPT
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Mastering C++ Fundamentals with Generative AI: A Hands-On
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Master in Python Language Quickly Using the ChatGPT Open AI
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Performance Marketing for eCommerce Brands
By - Zafer Mukeri, Founder- Inara Marketers
Office Productivity
Zero to Hero in Microsoft Excel: Complete Excel guide 2024
By - Metla Sudha Sekhar, IT Specialist and Developer
Finance
A2Z Of Money
By - elearnmarkets, Financial Education by StockEdge
Marketing
Modern Marketing Masterclass by Seth Godin
By - Seth Godin, Former dot com Business Executive and Best Selling Author
Astrology
Vastu Shastra Course
By - Sachenkumar Rai, Vastu Shashtri
Strategy
Succession Planning Masterclass
By - Nigel Penny, Global Strategy Advisor: NSP Strategy Facilitation Ltd.
Data Science
SQL for Data Science along with Data Analytics and Data Visualization
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
AI and Analytics based Business Strategy
By - Tanusree De, Managing Director- Accenture Technology Lead, Trustworthy AI Center of Excellence: ATCI
Web Development
A Comprehensive ASP.NET Core MVC 6 Project Guide for 2024
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Digital Marketing Masterclass by Pam Moore
By - Pam Moore, Digital Transformation and Social Media Expert
Artificial Intelligence(AI)
AI-Powered Python Mastery with Tabnine: Boost Your Coding Skills
By - Metla Sudha Sekhar, IT Specialist and Developer
Office Productivity
Mastering Microsoft Office: Word, Excel, PowerPoint, and 365
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Digital marketing - Wordpress Website Development
By - Shraddha Somani, Digital Marketing Trainer, Consultant, Strategiest and Subject Matter expert
Office Productivity
Mastering Google Sheets: Unleash the Power of Excel and Advance Analysis
By - Metla Sudha Sekhar, IT Specialist and Developer
Web Development
Mastering Full Stack Development: From Frontend to Backend Excellence
By - Metla Sudha Sekhar, IT Specialist and Developer
Finance
Financial Literacy i.e Lets Crack the Billionaire Code
By - CA Rahul Gupta, CA with 10+ years of experience and Accounting Educator
Data Science
SQL Server Bootcamp 2024: Transform from Beginner to Pro
By - Metla Sudha Sekhar, IT Specialist and Developer
Sivakumar Ramjee, Executive Director- Indirect Tax, Nangia Andersen LLP says these penal charges, resembling liquidated damages, do not represent a supply of services or goods under GST since they do not involve an exchange of value for a service or product. “Liquidated damages, by nature, are penalties for breach of contract rather than a payment for a service rendered.”
Penal charges on credit card and others are not covered under this clarification
In case you were wondering what if credit cards are covered under this clarification about no GST on penal charges, then the answer is no.Kothary, says, “The instruction dated 18.08.2023 issued by RBI on Fair Lending Practice - Penal Charges in Loan Accounts is applicable to all commercial banks, small finance banks (except payment banks), NBFCs including Housing finance companies and other financial institutions. However, Credit Cards, External Commercial Borrowings, Trade Credits and Structured Obligations are not covered by this clarification as the same are covered under product specific directions.”
Gagandeep Sood, Associate Director, Fox Mandal & Associates, says, "The clarification above applies only to loan-related penal charges, excluding credit cards, ECBs, trade credits, and structured obligations."
Why were GST tax demand notices issued for non-collection of GST on penal charges?
Ramjee, says despite the RBI emphasizing that these penal charges are not taxable under GST as they fall outside the scope of taxable services, some GST field officers failed to understand this.“The charges serve as a deterrent against non-compliance rather than compensation for loss, thus not constituting a taxable event under GST. Unfortunately this was being viewed by certain field formations that penal charges so levied are in the nature of payment / consideration for tolerating an act or situation,” says Ramjee.
How does this new clarification help GST registered taxpayers?
Chartered Accountant Akhil Pachori says, now GST registered taxpayers like banks, NBFCs, who have been issued notices under GST for not collecting GST on penal charges on loans, will get relief under this clarification. “These GST registered taxpayers will now have to request the GST proper officer to cancel the SCNs and cite this clarification as the reason. Although if any GST registered taxpayer has settled the tax demand or collected GST and deposited it with the government then no refunds will be issued now, despite this new clarification.”"The circular does not mention SCN cancellation but confirms no GST on penal charges for loan non-compliance. Taxpayers may challenge prior demands and seek withdrawal or relief basis this clarification," says Sood from Fox Mandal & Associates.
Ramjee agrees with Pachori and adds: “In view of this clarification, all existing GST demands on RBI regulated entities for penal charges for non-compliance with Loan contracts should be dropped in my view.”
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
This story originally appeared on: India Times - Author:Faqs of Insurances
