Providing loans to related entities is a supply under GST, the interest or discount on these loans is exempt from GST.

Key Takeaways:

1. Loan transactions between related parties are considered a supply under GST.

2. Interest or discount on loans is exempt from GST.

3. No GST is applicable when only interest or discount is charged, with no additional fees.

4. Processing fees or similar charges, if levied, are subject to GST.

5. The circular distinguishes between loans from independent lenders and those between related parties in terms of GST treatment.

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The Issue at Hand:

This circular aims to clear up the confusion around the topic,

When loans are given within the group or from the parent, how does GST apply?

Key Clarifications:

a) Loans as a Supply:

• The Scenario:

- A company gives a loan to its related company or an overseas parent lends to its Indian subsidiary.

• The Clarification:

- This act of giving a loan is considered a "supply" under GST laws .

• What it means:

- Just because it's a related-party transaction doesn't mean it's outside the GST framework.

b) GST Exemption on Interest:

• The Clarification:

- "Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services) are exempted" .

• Why it matters:

- The main component of most loans - the interest - is not taxable under GST.

c) Processing Fees and Other Charges:

• The Scenario:

- Some loans come with additional fees like processing charges.

• The Clarification:

- These fees, if charged, are subject to GST .

• What it means:

- While interest is exempt, other loan-related charges are not.

d) Related Party Loans vs. Independent Lender Loans:

• The Distinction:

- The circular recognizes that related-party loans often don't involve the same level of processing as loans from banks or independent lenders .

• The Implication:

- In many cases, related-party loans might not have processing fees, reducing GST implications.

e) No Fees, No GST:

• The Clarification:

- "In the cases, where no consideration is charged by the person from the related person, or by an overseas affiliate from its Indian party, for extending loan or credit, other than by way of interest or discount, it cannot be said that any supply of service is being provided" .

• What it means:

- If you're only charging interest on the loan with no extra fees, there's no GST to worry about.

The Big Picture:

1. For Multinational Corporations:

- Clearer rules on how to treat intra-group loans for GST purposes.

- Potential for simplified GST compliance in many cases.

2. For Domestic Group Companies:

- Similar clarity for loans between related Indian entities.

- Possibility of structuring loans to minimize GST implications.

3. For Tax Authorities:

- Guidance on how to approach GST audits of related-party loan transactions.

Examples:

1. Overseas Parent Loan:

- A US parent company lends $1 million to its Indian subsidiary.

- They charge only interest, no processing fee.

- GST Implication: No GST applicable.

2. Domestic Group Loan with Fees:

- Company A lends to its sister company B.

- They charge interest plus a 1% processing fee.

- GST Implication: No GST on interest, but GST applicable on the processing fee.

3. Bank Loan vs. Related Party Loan:

- Scenario 1: A bank lends to a company, charging interest and processing fees.

- Scenario 2: A parent company lends to its subsidiary, charging only interest.

- GST Implication: In Scenario 1, GST applies to processing fees. In Scenario 2, no GST is applicable.

FAQs:

Q1: Does this circular change how intra-group loans are treated under GST?

A1: It clarifies rather than changes the treatment. It confirms that while loans are considered a supply, the interest is exempt from GST, and additional fees (if any) are taxable.

Q2: If my overseas parent company gives a loan to our Indian entity, do we need to pay GST?

A2: If the loan only involves interest or discount, with no additional fees, no GST is applicable. However, if there are processing fees or similar charges, those would be subject to GST.

Q3: Are there any situations where interest on a loan could be subject to GST?

A3: Generally, interest on loans is exempt from GST. However, the circular specifically mentions that interest involved in credit card services is not exempt.

Q4: How does this circular affect the valuation of related-party loan transactions for GST purposes?

A4: When no consideration other than interest or discount is charged, there's no need to determine an open market value for GST purposes. GST valuation only becomes relevant if additional fees are charged.

Q5: Does this circular apply to all types of loans between related parties?A5: Yes, the principles outlined in this circular apply to various types of loans between related parties, including those between domestic entities and those involving overseas affiliates.

Key Precedents:

1. Central Goods and Services Tax Act, 2017 (CGST Act)

2. Section 7(1)(c) of CGST Act (definition of supply)

3. Schedule I of CGST Act (activities to be treated as supply even if made without consideration)

4. Notification No. 12/2017 - Central Tax (Rate) (exemption for interest on loans)

5. Rule 28 of Central Goods and Services Tax Rules, 2017 (valuation of supply)

6. Circular No. 218/12/2024-GST dated 26th June, 2024

Circular No.218/12/2024-GST

F. No. CBIC-20001/4/2024-GST

Government of India

Ministry of Finance

(Department of Revenue)

Central Board of Indirect Taxes and Customs

GST Policy Wing

North Block, New Delhi

Dated the 26th June 2024

To,

The Principal Chief Commissioners/ Chief Commissioners/ Principal Commissioners/Commissioners of Central Tax (All)

The Principal Directors General/ Directors General (All)

Madam/Sir,

Subject: Clarification regarding taxability of the transaction of providing loan by an overseas affiliate to its Indian affiliate or by a person to a related person- reg.

Representations have been received from trade and industry seeking clarity on whether there is any supply involved in the transaction of granting of loan by a person to a related person or by an overseas affiliate to its Indian entity, where the consideration being paid is only by way of interest or discount, and whether any GST is applicable on the same.

2. In order to clarify the issue and to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST Act”), hereby clarifies the issues as under:

S.No. Issue Clarification

Clarification regarding taxability of the transaction of providing loan by an overseas entity to its Indian related entity or by a person in India to a related person

1. As per clause (c) of sub-section (1) of section 7 of the CGST Act, read with S. No. 2 and S. No. 4 of Schedule I of CGST Act, supply of Circular No.218/12/2024-GST Indian affiliate or by a person to a related person, where there is no consideration in the nature of processing fee/ administrative charges/ loan granting charges etc., and the consideration is represented only by way of interest or discount, will be treated as a taxable supply of service under GST or not. goods or services or both between related persons, when made in the course or furtherance of business, shall be treated as supply, even if made without consideration. Therefore, it is evident that the service of granting loan/ credit/ advances by an entity to its related entity is a supply under GST.

2. Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services) are exempted under sub entry (a) of entry 27 of Notification No. 12/2017-Central Tax (Rate). Therefore, it is clear that the supply of services of granting loans/ credit/ advances, in so far as the consideration is represented by way of interest or discount, is fully exempt under GST.

3. It is mentioned that overseas affiliates or domestic related persons are generally charging no consideration in the form of processing fee/ service fee, other than the consideration by way of interest or discount on the loan amount. Doubts are being raised regarding the taxability of the services of processing/ administering/ facilitating the loan in such cases, by deeming the same as supply as per clause (c) of sub-section (1) of section 7 of the CGST Act, read with S. No. 2 and S. No. 4 of Schedule I of CGST Act. The processing fee/ service fee is generally a one-time charge that lenders levy on applicants when they apply for a loan. This fee is generally non-refundable and is used to cover the administrative cost of processing the loan application. Charges of any Circular No.218/12/2024-GST other nature in respect of loan, other than by way of interest or discount, would represent taxable consideration for providing the facilitation/ processing/ administration services for the loan and hence would be liable to GST. This has been clarified at serial number 42 in the Sectoral FAQ on Banking, Insurance and Stock Brokers Sector issued by CBIC.

4. It is significant to note that the processing/ service fee is generally charged by the bank/ financial institution from the recipient of the loan in order to cover the administrative cost of processing the loan application. An independent lender may carry out a thorough credit assessment of the potential borrower to identify and evaluate the risks involved and to consider methods of monitoring and managing these risks. Such credit assessment may include understanding the business of the applicant, as well as the purpose of the loan, financial standing and credibility of the applicant, how it is to be structured and the source of its repayment which may include analysis of the borrower’s cash flow forecasts, the strength of the borrower’s balance sheet, and where any collateral is offered, due diligence on the collateral offered may also be required to be carried out. To cover such costs, the independent lender generally collects a fee that is in the nature of processing fee/ administrative charges/ service fee/ loan granting charges, which is leviable to GST.

5. However, when an entity is extending a loan to a related entity, it may not require to follow such Circular No.218/12/2024-GST processes as are followed by an independent lender. For example, it may not need to go through the same process of information gathering about the borrower’s business, his financial standing and credibility and other details, as the required information may already be readily available within the group, or between related persons. The lender may not also take any collateral from the borrower. Accordingly, in case of loans provided between related parties, there may not be the activity of ‘processing’ the loan, and no administrative cost may be involved in granting such a loan. Therefore, it may not be desirable to place the services being provided for processing the loans by banks or independent lenders vis-a-vis the loans provided by a related party, on equal footing.

6. Even in case of loans provided between unrelated parties, there may not be any processing fee/ administrative charges/ loan granting charges etc., based on the relationship between the bank/ independent lender and the person taking the loan. The lender might waive off the administrative charges in full, based on the nature and amount of loan granted, as well as based on the relationship between the lender and the concerned person taking the loan.

7. Accordingly, in the cases, where no consideration is charged by the person from the related person, or by an overseas affiliate from its Indian party, for extending loan or credit, other than by way of interest or discount, it cannot be Circular No.218/12/2024-GST said that any supply of service is being provided between the said related persons in the form of processing/ facilitating/ administering the loan, by deeming the same as supply of services as per clause (c) of sub-section (1) of section 7 of the CGST Act, read with S. No. 2 and S. No. 4 of Schedule I of CGST Act. Accordingly, there is no question of levy of GST on the same by resorting to open market value for valuation of the same as per rule 28 of Central Goods and Services Tax Rules, 2017.

8. However, in cases of loans provided between related parties, wherever any fee in the nature of processing fee/ administrative charges/ service fee/ loan granting charges etc. is charged, over and above the amount charged by way of interest or discount, the same may be considered to be the consideration for the supply of services of processing/ facilitating/ administering of the loan, which will be liable to GST as supply of services by the lender to the related person availing the loan.

3. It is requested that suitable trade notices may be issued to publicize the contents of this Circular.

4. Difficulties, if any, in implementing this Circular may please be brought to the notice of the Board. Hindi version would follow.

(Sanjay Mangal)

Principal Commissioner (GST)