Finance Industry Development Council (FIDC), a representative body for NBFCs, on Thursday urged the Central Board of Indirect Taxes and Customs (CBIC) to clarify that the excess rate of interest retained by an NBFC in co-lending model with banks is not a consideration for any ‘service’ and hence, is not subject to Goods and Services Tax (GST). 

A letter to CBIC Chairman Sanjay Kumar Agarwal was sent by FIDC after the latter’s members reported an investigation of NBFCs and banks by DGGI (Directorate General of GST Intelligence), the intelligence unit under CBIC tasked with checking GST evasion, to determine whether GST has been evaded by these entities in co-lending model for any ‘service’ provided by one co-lender to another.

Under the co-origination arrangement, wherein the credit contributed is typically in the ratio of 80:20, the rate of interest charged by the NBFC is higher than the interest rate charged by banks due to the higher borrowing cost of NBFCs than banks and also because the major source of funding for NBFCs is banks, FIDC said.

“The higher rate of interest has no other significance and does not serve as a consideration in any way for any activity offered by the NBFC,” the NBFC body added. 

Under another arrangement wherein the banks structure co-lending as a post-disbursal takeover of their share in the loan on a back-to-back basis, apart from the interest income received from the customers and shared between banks and NBFCs in the pre-agreed ratio, neither party shall remunerate the other party in any other manner whatsoever, FIDC said.  

Interest income is the difference between the blended rate of interest charged from the borrower and interest paid to the banks/ financial institutions on the co-lent loans. 

“This excess interest spread is an “interest income” subject to the levy of income tax and is in no manner (by nature and spirit) a fee or a charge and is therefore not subject to the levy of GST,” FIDC highlighted. 

Sourcing NBFC (NBFC sourcing the borrower) continues to be the single point of interface for the customers as it continues to be the primary counterparty for the borrower. Sourcing NBFC does not provide any new or additional service to the bank and continues to perform its role as lender to the borrower, it noted further. 

The co-lending model by the Reserve Bank of India aims to address the growing credit demands in sectors such as MSME, agriculture, and housing by allowing banks and NBFCs to collaborate to make loans more affordable to the end-borrowers.