No GST Payable on Penal Charges collected by Banks and NBFCs from Borrower: FM Clarifies
This decision provides much-needed clarity on the taxation of penal charges and resolves an ongoing concern within the banking and financial sectors
During the press meet of the 55th GST Council meeting, Union Finance Minister Nirmala Sitharaman clarified that penal charges collected by banks and NBFCs from borrowers will not attract Goods and Services Tax ( GST ). This decision provides much-needed clarity on the taxation of penal charges and resolves an ongoing concern within the banking and financial sectors. Penal charges...
During the press meet of the 55th GST Council meeting, Union Finance Minister Nirmala Sitharaman clarified that penal charges collected by banks and NBFCs from borrowers will not attract Goods and Services Tax ( GST ).
This decision provides much-needed clarity on the taxation of penal charges and resolves an ongoing concern within the banking and financial sectors.
Penal charges are levied by banks on borrowers for non-compliance with the terms of a loan agreement, such as delays in EMI payments or breaches of contractual obligations. These charges are often imposed to deter such defaults and are not considered a direct supply of services.
Master GST - Expert-Led Courses for Ambitious Professionals
Previously, there was ambiguity over whether such charges should be classified as a service under GST Act, undoubtedly making them taxable. This uncertainty led to varying interpretations and concerns about compliance among banks and financial institutions.
The GST Council, after detailed deliberations, concluded that penal charges do not qualify as consideration for a service under the GST arena.
The implications could be that the Banks will no longer need to account for GST on penal charges. And, the borrowers are spared from paying GST on penalties, which are already punitive in nature.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
