No GST On Penal Charges Levied By Banks, NBFCs? CBIC Clarifies

Goods and Services Tax (GST) will not be applicable on penal charges levied by banks and non-banking finance companies (NBFCs), the CBIC has said.

The Central Board of Indirect Taxes and Customs (CBIC) through a circular has also clarified that GST will not be levied on transactions of up to Rs 2,000 facilitated by payment aggregators on online platforms.

Clarifying the issue of GST applicability on penal charges levied by banks and NBFCs, the CBIC said penal charges levied by Regulated Entities governed by the RBI are essentially in the nature of charges for breach of terms of contract and hence, do not attract GST.

"As recommended by the 55th GST Council, it is hereby clarified that no GST is payable on the penal charges levied by Regulated Entities... for non-compliance with material terms and conditions of loan contract by the borrower," the CBIC said.

AMRG & Associates Senior Partner Rajat Mohan said this clarification is significant as it settles interpretational disputes at the field level.

"By reiterating the essence of contractual obligations' that contracts are meant for performance and not breach' the GST Council has eliminated ambiguity regarding the taxability of such charges. The exclusion of penal charges from the GST ambit ensures compliance with RBI directives and prevents undue financial burdens on regulated entities and borrowers," Mohan added.

With regard to taxation on payment aggregators, the CBIC said it has received representations seeking clarity on the applicability of GST exemption to Payment Aggregators (PAs) in relation to settlement of up to Rs 2,000 in a single transaction, transacted through credit card, debit card, charge card or other payment card services.

Payment Aggregators (PAs) are entities that facilitate e-commerce sites and merchants to accept various payment instruments from their customers without the need for the e-commerce sites and merchants to create a separate payment integration system of their own. In the process, PAs receive payments from customers, pool and transfer them on to the merchants within a specified time period.

The CBIC also quoted RBI guidelines which distinguish PAs and Payment Gateways, which provide technology infrastructure to route and facilitate processing of an online payment transaction without any involvement in handling of funds.

"It is hereby clarified that GST exemption ...  is available to RBI regulated Payment Aggregators (PAs) in relation to settlement of an amount, up to Rs 2,000 in a single transaction, transacted through credit card, debit card, charge card or other payment card services, as PAs fall within the definition of 'acquiring bank'," the CBIC said.

The CBIC also clarified that this GST exemption is limited to payment settlement function only, which involves handling of money, and does not cover Payment Gateway services.

EY Tax Partner, Saurabh Agarwal said the clarifications issued by the CBIC on interpretative issues demonstrate the Government's commitment to foster a predictable tax environment for businesses. This approach is likely to lead to greater tax certainty and a more conducive business environment.