The Central Board of Indirect Taxes and Customs (CBIC) recently issued Circular No. 218/12/2024-GST, which addresses the taxability of loan transactions between related parties. This clarification is crucial for businesses involved in cross-border financial dealings, as well as for those engaging in loans within their corporate groups. Let’s delve into the key points of this circular to understand its implications.
Key Points of the Circular
- Supply of Services under GST: According to the CGST Act, the supply of goods or services between related parties, even without consideration, is deemed a supply. This includes loans provided by an overseas affiliate to its Indian entity or by a person to a related person. The mere act of providing a loan is considered a supply under GST laws.
- Exemption on Interest or Discount: The supply of services by way of extending deposits, loans, or advances, where the consideration is represented by way of interest or discount (excluding interest on credit card services), is exempt from GST. Therefore, the interest or discount on loans remains outside the GST ambit.
- Processing and Administrative Fees: Generally, banks or financial institutions charge a processing fee to cover administrative costs. This fee is subject to GST. However, when loans are extended within a related entity, such fees may not be applicable if no significant administrative process is involved. If any fee over and above the interest is charged, it will be subject to GST.
- Administrative Costs in Related Party Transactions: In related party transactions, the lender might not undertake the extensive administrative processes typically required by independent lenders. This includes evaluating the borrower’s creditworthiness and collateral. Hence, if no additional fees are charged, these transactions do not attract GST.
- Clarifications for Trade and Industry: The circular ensures that there is no GST on the loan amount itself, provided no other fees are charged. This brings uniformity in how such transactions are treated across different jurisdictions in India.
Examples for Better Understanding
- Scenario 1: Loan with Interest Only ABC Ltd. in India receives a loan from its overseas parent company, XYZ Inc., with interest payable on the principal amount. No other fees are involved. In this case, the transaction is exempt from GST as the consideration is solely in the form of interest.
- Scenario 2: Loan with Processing Fee ABC Ltd. takes a loan from an independent lender who charges a processing fee apart from the interest. Here, the processing fee will attract GST, but the interest component will remain exempt.
- Scenario 3: Related Party Loan without Additional Fees ABC Ltd. extends a loan to its sister company without any additional processing or administrative fees. Since there are no extra charges apart from the interest, this transaction is exempt from GST.
FAQs
Q1: Are loans between related parties always subject to GST? No, loans between related parties are not subject to GST if the only consideration is interest or discount. However, any additional fees charged will be subject to GST.
Q2: What constitutes a related party under GST? Related parties under GST are defined by the relationships between entities, such as subsidiaries, parent companies, and affiliates, where there is control or significant influence over each other.
Q3: How is the processing fee treated in loan transactions? The processing fee charged by banks or lenders is considered a taxable supply of service and is subject to GST. This does not apply if no such fee is charged in related party transactions.
Q4: Are there any exceptions to the GST exemption on interest? Yes, interest involved in credit card services is not exempt and is subject to GST.
