Finance companies that work with banks to provide loans could now face an 18% GST on certain services they provide to banks, following a decision by the GST Council’s fitment committee.

The move is aimed at clearing up a long-standing question over how these services should be taxed.

What does it mean?

In simple terms, some finance companies, known as NBFCs, work with banks to provide loans. The finance company may help find customers, assess their creditworthiness and handle parts of the loan process.

The government has decided that the service provided by the finance company to the bank will attract 18% GST. The value of that service will be calculated using the method prescribed by the Reserve Bank of India (RBI).

Does this mean customers will pay 18% more?

No.

The 18% GST does not apply to the entire loan amount. The interest charged on the underlying loan will remain exempt from GST.

The tax is related to the service provided between the finance company and the bank.

Why is the government doing this?

There has been confusion over whether the money earned by finance companies in these arrangements should be treated as interest or as payment for a separate service.

The new clarification is intended to bring greater clarity to the tax treatment of these arrangements and reduce disputes.

The proposal comes as the GST Council prepares to discuss a wider set of GST-related reforms and clarifications.

In simple words

Finance companies providing certain services to banks will face 18% GST, but this does not mean borrowers will suddenly pay 18% GST on their loan interest.

The final decision and implementation will depend on the GST Council's formal process.