GST on Co-Lending Charges What NBFCs and Banks Need to Know
The GST on co-lending charges has been a grey area for years. With different interpretations and tax positions taken by NBFCs and banks, confusion around GST applicability in co-lending arrangements persisted. Now, both parties have reached a consensus, aligning with the GST law and CBIC guidelines.
In this blog, we break down the implications of this development for Indian lenders and borrowers, and what compliance steps must be taken.
What is Co-Lending?
Under the co-lending model (CLM), banks and NBFCs jointly lend to priority sector borrowers. The RBI’s guidelines (last updated in 2020) allow:
- NBFCs to originate the loan
- Banks to take at least 80% share of the exposure
- NBFCs to hold the remaining 20% and service the loan
NBFCs charge a co-lending fee or service fee from banks for origination, underwriting, and collection services.
The GST Confusion So Far
Earlier, NBFCs were unclear whether the co-lending service fee was taxable under GST. Key concerns included:
- Whether co-lending is a composite supply with interest (which is exempt)
- Or a separate taxable supply of services
Some NBFCs treated it as exempt; others paid GST under reverse charge or forward charge based on legal opinions.
Recent Consensus: GST Applicable on Co-Lending Charges
As per recent industry consensus and clarification from professional circles:
- GST is applicable on co-lending charges charged by NBFCs to banks.
- The services rendered (loan origination, processing, recovery) are separate taxable supplies.
- Interest income remains exempt, but service fees are taxable under GST (18%).
This aligns with:
- Section 7 of CGST Act, 2017 – defines supply of services
- CBIC Circular No. 62/36/2018-GST – clarified that loan-related services are taxable
- Exemption under Entry No. 27 of Notification No. 12/2017-Central Tax (Rate) only applies to pure interest income
Compliance Checklist for NBFCs & Banks
| Aspect | NBFCs | Banks |
|---|---|---|
| GST on co-lending fee | Must charge 18% GST | Claim ITC if used for taxable output |
| Invoice format | Tax invoice under Section 31 of CGST Act | Match with books for ITC |
| Time of supply | As per Section 13 of CGST Act | Based on invoice/payment |
| Return filing | Include in GSTR-1 & GSTR-3B | Reconcile in GSTR-2B |
| Interest portion | Exempt – no GST | No ITC reversal required |
Expert View: What Practitioners Say
“Co-lending charges must be treated as a separate supply. GST should be levied and invoiced properly to ensure credit flow and avoid future litigation,”
says CA Mukesh Sharma, a GST expert specialising in NBFC compliance.
Key Takeaways for Taxpayers
- Co-lending charges are not exempt like interest. They’re a fee for services and hence taxable.
- Proper invoice classification is critical.
- Banks can claim ITC, but only if NBFC invoices are GST-compliant.
- NBFCs must register under GST and maintain documentation to avoid demand notices.
🔁 Related: GST on Loan Processing Fees Explained
FAQ: GST on Co-Lending
Q1. Is interest exempt under GST in co-lending?
Yes, interest earned is exempt under Entry 27 of Notification 12/2017-CT(Rate).
Q2. Is NBFC required to charge GST on co-lending fee?
Yes, NBFCs must levy 18% GST on service fees billed to banks.
Q3. Can banks claim ITC on GST paid to NBFCs?
Yes, if the invoice is in proper format and the credit is eligible under Section 16.
Final Word
With both NBFCs and banks now agreeing to levy GST on co-lending charges, it’s important to align systems and contracts accordingly. For expert filing support and compliance tracking, reach out to Efiletax – your trusted tax and GST compliance partner.
Summary
Co-lending charges under GST clarified! NBFCs must now charge 18% GST on service fees billed to banks. Interest remains exempt, but services like loan origination are taxable. Read this expert-backed guide to ensure co-lending compliance. Updated with latest CBIC circulars and industry practices.