Understanding CBIC’s Clarification on GST Applicability
The Central Board of Indirect Taxes and Customs (CBIC) has provided much-needed clarity regarding the applicability of Goods and Services Tax (GST) on penal charges imposed by banks and non-banking financial companies (NBFCs). As per the latest circular, penal charges levied by RBI-regulated entities for breaches of contract terms will not attract GST. This clarification, aligned with the 55th GST Council recommendations, aims to resolve interpretational disputes and ensure compliance with RBI directives.
Why Penal Charges Are Not Subject to GST
According to the CBIC, penal charges imposed by banks and NBFCs are not a fee for services rendered but rather a consequence of contract breaches. Since GST applies to the supply of goods and services, these charges do not fall within its ambit. This move prevents undue financial burdens on both financial institutions and borrowers.
Relief for Payment Aggregators on Small Transactions
In addition to the clarification on penal charges, CBIC has addressed concerns regarding the taxation of payment aggregators. The circular confirms that transactions up to ₹2,000 conducted via credit, debit, or charge cards are exempt from GST if processed by RBI-regulated payment aggregators. This exemption applies strictly to the settlement function and does not extend to payment gateway services, which provide technological infrastructure but do not handle funds.
Key Distinctions Between Payment Aggregators & Gateways
| Feature | Payment Aggregator (PA) | Payment Gateway (PG) |
|---|---|---|
| Handles Funds | Yes | No |
| Facilitates Payments | Yes | Yes |
| Provides Tech Infra | No | Yes |
| GST Exemption | Yes (up to ₹2,000 transactions) | No |
This distinction is crucial in ensuring that only entities involved in the direct handling of money qualify for GST exemption.
Industry Reactions & Implications
Experts have welcomed the move, emphasizing that it enhances tax certainty and prevents unnecessary litigation. Rajat Mohan, Senior Partner at AMRG & Associates, noted that by reaffirming the principle that contracts are meant for performance and not breach, the CBIC has reduced ambiguity regarding GST on penal charges.
Similarly, tax professionals believe that granting GST exemption to regulated payment aggregators ensures smoother digital transactions, thereby promoting financial inclusion and ease of doing business.
Final Thoughts: A Step Towards Predictable Taxation
The CBIC’s recent clarifications reflect the government’s commitment to creating a stable and predictable tax environment. By removing doubts about GST applicability on penal charges and small digital transactions, this move fosters compliance, reduces legal disputes, and encourages a more business-friendly ecosystem.