Circular No.218/12/2024-GST
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F. No. CBIC-20001/4/2024-GST
Government of India
Ministry of Finance
(Department of Revenue)
Central Board of Indirect Taxes and Customs
GST Policy Wing
*****
North Block, New Delhi
Dated the 26th June 2024
To,
The Principal Chief Commissioners/ Chief Commissioners/ Principal Commissioners/
Commissioners of Central Tax (All)
The Principal Directors General/ Directors General (All)
Madam/Sir,
Subject: Clarification regarding taxability of the transaction of providing loan by an
overseas affiliate to its Indian affiliate or by a person to a related person- reg.
Representations have been received from trade and industry seeking clarity on
whether there is any supply involved in the transaction of granting of loan by a person to a
related person or by an overseas affiliate to its Indian entity, where the consideration being
paid is only by way of interest or discount, and whether any GST is applicable on the same.
2.
In order to clarify the issue and to ensure uniformity in the implementation of the
provisions of law across the field formations, the Board, in exercise of its powers conferred
by section 168 (1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to
as “CGST Act”), hereby clarifies the issues as under:
S.N
o.
Issue
Clarification
Clarification regarding taxability of the transaction of providing loan by an overseas entity
to its Indian related entity or by a person in India to a related person
1
Whether the activity of
providing
loans
by
an
overseas affiliate to its
1. As per clause (c) of sub-section (1) of
section 7 of the CGST Act, read with S. No. 2 and
S. No. 4 of Schedule I of CGST Act, supply of
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Indian affiliate or by a
person to a related person,
where
there
is
no
consideration in the nature
of
processing
fee/
administrative
charges/
loan granting charges etc.,
and the consideration is
represented only by way of
interest or discount, will be
treated as a taxable supply
of service under GST or
not.
goods or services or both between related persons,
when made in the course or furtherance of
business, shall be treated as supply, even if made
without consideration. Therefore, it is evident that
the service of granting loan/ credit/ advances by an
entity to its related entity is a supply under GST.
2.
Services by way of extending deposits, loans
or advances in so far as the consideration is
represented by way of interest or discount (other
than interest involved in credit card services) are
exempted under sub entry (a) of entry 27 of
Notification
No.
12/2017-Central
Tax
(Rate).
Therefore, it is clear that the supply of services of
granting loans/ credit/ advances, in so far as the
consideration is represented by way of interest or
discount, is fully exempt under GST.
3. It is mentioned that overseas affiliates or
domestic related persons are generally charging no
consideration in the form of processing fee/ service
fee, other than the consideration by way of interest
or discount on the loan amount. Doubts are being
raised regarding the taxability of the services of
processing/ administering/ facilitating the loan in
such cases, by deeming the same as supply as per
clause (c) of sub-section (1) of section 7 of the
CGST Act, read with S. No. 2 and S. No. 4 of
Schedule I of CGST Act. The processing fee/
service fee is generally a one-time charge that
lenders levy on applicants when they apply for a
loan. This fee is generally non-refundable and is
used to cover the administrative cost of
processing the loan application. Charges of any
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other nature in respect of loan, other than by way
of interest or discount, would represent taxable
consideration
for
providing
the
facilitation/
processing/ administration services for the loan and
hence would be liable to GST. This has been
clarified at serial number 42 in the Sectoral FAQ
on Banking, Insurance and Stock Brokers Sector
issued by CBIC.
4.
It is significant to note that the processing/
service fee is generally charged by the bank/
financial institution from the recipient of the loan
in order to cover the administrative cost of
processing the loan application. An independent
lender may carry out a thorough credit assessment
of the potential borrower to identify and evaluate
the risks involved and to consider methods of
monitoring and managing these risks. Such credit
assessment may include understanding the business
of the applicant, as well as the purpose of the loan,
financial standing and credibility of the applicant,
how it is to be structured and the source of its
repayment which may include analysis of the
borrower’s cash flow forecasts, the strength of the
borrower’s balance sheet, and where any collateral
is offered, due diligence on the collateral offered
may also be required to be carried out. To cover
such costs, the independent lender generally
collects a fee that is in the nature of processing fee/
administrative charges/ service fee/ loan granting
charges, which is leviable to GST.
5.
However, when an entity is extending a loan
to a related entity, it may not require to follow such
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processes as are followed by an independent
lender. For example, it may not need to go through
the same process of information gathering about
the borrower’s business, his financial standing and
credibility and other details, as the required
information may already be readily available
within the group, or between related persons. The
lender may not also take any collateral from the
borrower. Accordingly, in case of loans provided
between related parties, there may not be the
activity of ‘processing’ the loan, and no
administrative cost may be involved in granting
such a loan. Therefore, it may not be desirable to
place the services being provided for processing
the loans by banks or independent lenders vis-a-vis
the loans provided by a related party, on equal
footing.
6.
Even in case of loans provided between
unrelated parties, there may not be any processing
fee/ administrative charges/ loan granting charges
etc., based on the relationship between the bank/
independent lender and the person taking the loan.
The lender might waive off the administrative
charges in full, based on the nature and amount of
loan granted, as well as based on the relationship
between the lender and the concerned person
taking the loan.
7.
Accordingly, in the cases, where no
consideration is charged by the person from the
related person, or by an overseas affiliate from its
Indian party, for extending loan or credit, other
than by way of interest or discount, it cannot be
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said that any supply of service is being provided
between the said related persons in the form of
processing/ facilitating/ administering the loan, by
deeming the same as supply of services as per
clause (c) of sub-section (1) of section 7 of the
CGST Act, read with S. No. 2 and S. No. 4 of
Schedule I of CGST Act. Accordingly, there is no
question of levy of GST on the same by resorting
to open market value for valuation of the same as
per rule 28 of Central Goods and Services Tax
Rules, 2017.
