IGST on Credit Card Loans: Calcutta HC Says No Tax on Simple Loans to Cardholders

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Case Name

Ramesh Kumar Patodia vs. City Bank N.A. and Ors. (High Court of Calcutta)

APO 10 of 2023 with WPO 547 of 2019

Date: 25th July 2023

Key Takeaways

• Loans to credit card holders are not automatically “credit card services.” If a bank gives a loan to a credit card holder, but the loan is not processed through the card (e.g., it’s disbursed by cheque), it is treated as a regular loan, not a credit card service.
• IGST is not applicable to simple loan transactions. The court clarified that only interest involved in actual credit card services (like revolving credit or delayed payment on card transactions) is subject to IGST, not interest on separate loans to cardholders.
• Banks must refund IGST wrongly collected on such loans. The court ordered the bank to refund the IGST to the borrower.
• Acceptance of a contract term does not override the law. Even if a borrower agrees to pay IGST in the loan agreement, if the law does not require it, the term is unenforceable.

Issue

Is the interest paid on a loan given to a credit card holder by a bank (where the loan is not directly linked to a credit card transaction) subject to IGST as a “credit card service”?

Facts

• Parties:
• Appellant: Ramesh Kumar Patodia (borrower, credit card holder)
• Respondent: City Bank N.A. (the bank)
• Timeline:
• February 2019: Bank offers a loan of ₹6,50,000 to Patodia, a credit card holder, at 13% interest, repayable in 12 EMIs.
• March 2019: Loan disbursed by account payee cheque.
• The EMIs (including interest) were reflected in the monthly credit card statements.
• May 2019: Patodia objects to IGST being charged on the interest component of the loan.
• Patodia repaid the loan, including interest and IGST, but challenged the IGST charge in court.
• Dispute:
• Patodia argued that the loan was a separate transaction, not a credit card service, and should not attract IGST.
• The bank argued that the loan was part of the credit card services and IGST was applicable as per the contract.

Arguments

Appellant (Patodia)

• The loan was independent of the credit card; it was not a transaction made using the card.
• The loan was disbursed by cheque, not by swiping or using the card.
• Only the repayment was reflected in the credit card statement for convenience.
• As per Notification No. 9/2017-Integrated Tax (Rate) dated 28th June 2017, only “interest involved in credit card services” is taxable, not interest on simple loans.
• The definition of “credit card services” in Section 65(33A) of the Finance Act, 1994 does not include such loans.

Respondent (City Bank)

• The loan was offered only to credit card holders, making it part of the credit card services.
• The contract with Patodia included a clause for IGST on the interest.
• The loan was processed as part of the credit card account, so IGST should apply.

Union of India (Government)

• IGST is payable on inter-state services, including loans from a bank in one state to a borrower in another.
• The exemption notification does not cover credit card services, so IGST applies to such services.

Key Legal Precedents & Statutory References

• Notification No. 9/2017-Integrated Tax (Rate) dated 28th June 2017:
• Exempts most financial services from IGST, except “interest involved in credit card services.”
• Section 65(33A) of the Finance Act, 1994:
• Defines “credit card services” as services provided by banks in relation to the use, operation, or settlement of transactions through credit cards.
• Section 5 of the IGST Act, 2017:
• The charging section for IGST on inter-state supply of goods and services.
• Section 2(102) of the CGST Act, 2017:
• Defines “service” as anything other than goods, money, and securities, but includes activities relating to the use of money.
• Section 15 of the CGST Act, 2017:
• Specifies that the value of supply includes interest, late fee, or penalty.

The court relied on the above notification and statutory definitions to conclude that only interest directly related to credit card transactions is taxable under IGST, not interest on separate loans to cardholders.

Judgement

• Decision: The appeal was allowed. The court held that the loan given to Patodia was a simple loan, not a credit card service, and therefore not subject to IGST.
• Reasoning:
• The loan was not processed through the credit card; it was disbursed by cheque.
• The mere fact that the borrower was a credit card holder does not make the loan a credit card service.
• The exemption notification and statutory definitions do not include such loans as credit card services.
• The contract clause requiring IGST payment is unenforceable if the law does not require it.
• Order:
• The bank must refund the IGST collected on the loan interest to Patodia, via the respondent bank, within three months of the order.

FAQs

Q1: Does this mean banks can never charge IGST on loans to credit card holders?

A: Banks cannot charge IGST on simple loans given to credit card holders if the loan is not processed through the card. IGST applies only to interest on actual credit card transactions (like revolving credit or delayed payment on card purchases).

Q2: What if the loan is repaid through the credit card account?

A: Repayment method does not change the nature of the loan. If the loan itself was not processed through the card, it remains a simple loan and is not a credit card service.

Q3: What if the contract says IGST will be charged?

A: Even if the borrower agreed to pay IGST in the contract, the clause is unenforceable if the law does not require IGST for that transaction.

Q4: What is the difference between a loan and a credit card service?

A: A loan is a sum of money lent by the bank, usually for a specific purpose, and is a welfare scheme. A credit card service allows customers to buy goods/services on credit from third parties, with the bank settling the payment and charging the customer later.

Q5: What should I do if I was wrongly charged IGST on a similar loan?

A: You may be entitled to a refund. You should approach your bank and, if necessary, seek legal recourse based on this judgment.