In a major development for the financial sector, non-banking financial companies (NBFCs) and banks have reached a consensus to levy 18% Goods and Services Tax (GST) on service charges arising from co-lending arrangements. This GST will likely apply to 0.5%–1% of the total loan amount, according to industry sources.
GST to Be Levied on Co-Lending Charges
This agreement marks the end of prolonged discussions between NBFCs and banks on whether a service element exists in co-lending transactions. The move also aligns with the Reserve Bank of India’s (RBI) continued policy push to promote co-lending, especially as the assets under management (AUM) in this space cross ₹1 lakh crore.
Under the current co-lending model, NBFCs typically contribute 20% of the loan disbursal, while partner banks cover the remaining 80%. NBFCs also handle the sourcing and servicing of the loans. Until now, these companies argued that the additional income they earn—referred to as “excess interest spread”—was purely interest income and not a fee-based service, and hence not subject to GST.
GST Clarity Expected in Upcoming Council Meeting
The final decision on implementing GST on co-lending service charges is expected to be formalized in the next GST Council meeting. Meanwhile, the Department of Revenue has asked the Finance Industry Development Council (FIDC), which represents NBFCs, to propose a minimum charge value in co-lending agreements. This will likely serve as the floor for GST calculations.
The GST would be applied on the higher of:
- The actual service charge levied, or
- The proposed minimum charge.
This measure is aimed at standardizing GST applicability and ensuring compliance across the sector.
Co-Lending Growth and Regulatory Oversight
The RBI’s co-lending framework, launched six years ago, is witnessing exponential growth, with projections of a 35-40% annual growth rate. Initially limited to priority sector lending (PSL), the model is now being extended to cover all loan segments under proposed draft guidelines.
Additionally, the Directorate General of GST Intelligence (DGGI) has initiated investigations to identify potential GST evasion in co-lending models used by banks and NBFCs.
Debate Over Nature of Income in CLAs
Previously, the FIDC contended that the difference between the blended interest rate charged to borrowers and the bank’s share was not a service fee, but rather an “interest income” and should only be subject to income tax, not GST.
For example, if a co-lending arrangement offers a loan at 16% interest, and the bank receives 10% on its 80% share, the remaining 6%—earned on the bank’s portion—would be retained by the NBFC as part of the co-lending agreement. NBFCs have argued this excess is interest earned, not a service charge.
Revised Co-Lending Guidelines in the Pipeline
The RBI’s draft guidelines also aim to broaden the scope of co-lending by including more regulated entities such as All India Financial Institutions. The draft proposes greater flexibility in structuring co-lending arrangements without fixed proportions for sharing risk and reward, further boosting participation from financial institutions.
Conclusion
As co-lending becomes a cornerstone of inclusive credit delivery in India, this clarity on GST applicability is expected to bring more transparency and uniformity in taxation. With the co-lending AUM nearing ₹1 lakh crore and growing steadily, aligning tax policies with evolving financial models is a welcome move for both regulators and stakeholders.