Introduction
The Central Board of Indirect Taxes and Customs ('CBIC') issued a Circular[i] clarifying the taxability of transactions involving loans provided by overseas affiliates to their Indian counterparts or between related entities within India. This clarification addresses industry concerns regarding the applicability of GST on transactions where loans are extended solely based on interest or discount, without additional charges such as processing fees or administrative costs.
Key Clarifications of the Circular
Loans Between Related Entities: The Circular clarifies that the supply of services involving the granting of loans or credit advances, where the consideration is represented solely by way of interest or discount, is fully exempt from GST.
Processing and Administrative Costs: In cases where loans are provided between related persons, the Circular acknowledges that the activity of processing such loans may not be required, and no administrative costs may be incurred in granting such loans. Consequently, the concept of deemed supply of services between related persons, as per s. 7(1)(c) of the CGST Act, read with entries 2 and 4 of sch. I of the CGST Act cannot be applied in such cases.
Fees Over and Above Interest or Discount: The Circular explicitly states that if any processing fees, administrative charges, service fees, or loan granting charges are charged over and above the interest or discount, these will be treated as consideration for the supply of services related to the processing, facilitating, or administering of the loan. Such fees will be liable to GST.
Conclusion
This clarification by the CBIC is a step for the trade and industry, as it is expected to resolve pre-existing disputes regarding the taxability of loan transactions between related entities. By clearly distinguishing between transactions involving only interest or discount and those with additional fees, the Circular provides a straightforward framework for GST compliance.
End Note
[i] No. 218/12/2024-GST dated 26.06.2024.
Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.
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