CBIC Confirms No GST Applicability on Penal Charges Imposed by Banks and NBFCs

The Central Board of Indirect Taxes and Customs (CBIC) has clarified that Goods and Services Tax (GST) will not apply to penal charges imposed by banks and non-banking finance companies (NBFCs). This decision aligns with the recommendations of the 55th GST Council meeting. The CBIC explained that these charges, governed by the Reserve Bank of India (RBI), are for breaches of contract terms and thus exempt from GST.

Representative image

Additionally, the CBIC has addressed concerns regarding GST on transactions facilitated by payment aggregators. It stated that transactions up to Rs 2,000 conducted through credit, debit, or charge cards are exempt from GST. This exemption applies to payment aggregators regulated by the RBI, as they are considered acquiring banks in these transactions.

GST Exemption for Payment Aggregators

Payment aggregators play a crucial role in enabling e-commerce sites and merchants to accept various payment methods without needing their own payment systems. They collect payments from customers and transfer them to merchants within a set timeframe. The CBIC highlighted that this GST exemption is specific to the settlement function involving money handling and does not extend to payment gateway services.

AMRG & Associates Senior Partner Rajat Mohan noted that this clarification resolves interpretational disputes at the field level. By emphasizing that contracts are intended for performance rather than breach, the GST Council has removed uncertainty about the taxability of such charges. This move ensures compliance with RBI guidelines and prevents unnecessary financial strain on regulated entities and borrowers.

Impact on Business Environment

The CBIC's clarification on penal charges and payment aggregator transactions reflects the government's commitment to creating a predictable tax environment. EY Tax Partner Saurabh Agarwal believes these clarifications will lead to greater tax certainty and a more favourable business climate. The government's approach aims to foster a stable environment for businesses operating in India.

The CBIC also referenced RBI guidelines distinguishing between payment aggregators and payment gateways. While payment gateways provide technology infrastructure for processing online payments, they do not handle funds directly. This distinction is crucial in determining the applicability of GST exemptions.

This clarification by the CBIC ensures that penal charges levied by regulated entities do not attract GST, aligning with RBI directives. It also provides clarity on GST exemptions for small transactions facilitated by payment aggregators, promoting ease of doing business in India.