Impact of GST on Non-Banking Financial Companies in India

  • December 28, 2023
  • Registrationwala
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An NBFC stands for Non-Banking Financial Company. It is a company registered under the Companies Act of 1956. The company is involved in various financial activities such as lending, hire-purchase, leasing, insurance business, chit funds, and acquisition of stocks and shares. However, in some cases, they also accept deposits from customers.

 

The rules and regulations for NBFCs are set by the Reserve Bank of India. Some examples of top NBFC in India are Bajaj Finserv, Power Finance Corporation Limited, Mahindra & Mahindra Financial Service, Shriram Transport Finance Company, Muthoot Finance Ltd, etc. In the article, we shared how the GST regime impacts the NBFCs in India.

What is GST?

GST stands for Goods and Services Tax and it is an indirect tax implemented on the supply of goods and services. This tax is imposed at every stage of the supply chain and is based on each value-added stage. This replaces the direct taxes such as VAT, excise duty, service taxes, etc. However, this tax is applied to both goods and services and it is governed by a single domestic indirect taxation law. Under this tax regime, tax is charged at every point of sale.

GST Applicability on Non-Banking Financial Company

In the previous indirect tax regime, most of the NBFC services were exempted but there are a few exceptions that were liable to a centralized service tax. However, in the new GST tax regime, there is a change in the rules. Now the entities have to obtain registration in each state from where they provide taxable supplies. The GST has impacted various aspects of a business such as:

  • Billing
  • Information Technology Systems
  • Compliance and governance frameworks of NBFCs

In the initial years of GST, it is expected that it will have a significant impact on NBFCs. One of the major impacts is that there is no cascading effect of GST on taxes. Based on the previous service tax regime, the NBFCs cannot claim credit for Value Added Tax (VAT). So, this increases the additional costs for the company. Now in the GST regime, the NBFCs can avail credit for input tax paid on the supply of goods and services.

Details of GST Rates on NBFC Income

The NBFCs are engaged in the different types of businesses and the income generated is taxable under GST. Below is a table that shows the GST rates for each type of income:

 

Type of Income

Taxable/ Exempt under GST

Rate

Interest Income on advances

Exempt

Nil

Additional Interest Income

May be taxable if it is in nature of a penalty

18%

Penalty for delayed payment of loan instalments

May be taxable

18%

Processing Fee 

Taxable

18%

Foreclosure & Swap Charges 

Taxable

18%

Discounting income 

Exempt

Nil

Syndication/ Arranger fee 

Taxable

18%

Gain on sale of investments 

Exempt

Nil

Interest Income from investments 

Exempt

Nil 

Referral and Commission income (from financial product distribution)

Taxable

18%

 

From the above table, it is concluded that most of the services offered by NBFCs fall in the category of 18%. However, the NBFCs have to issue a tax invoice compliant with the guidelines of Central Goods and Services Tax (CGST) Rules, 2017.  

 

Issuing a bill of supply is important for exempt supplies, in some cases where taxable supplies and exempt supplies are the same, issue a “Tax Invoice cum Bill of Supply”. The NBFCs usually state accounts to their customers which must comply with the CGST Rules, 2017.

Positive Impact of GST on NBFC

The following are the advantages of the Goods and Services Tax (GST) on NBFCs:

  • The GST has included all indirect taxes under a single umbrella. And eliminate the need for taxpayers to pay the state cess, excise duty, purchase tax, sales tax, etc separately to the authorities.
  • The GST requires return filing and digital compliance, so the NBFCs can file their  GST return without any issues.
  • Entities that have an annual income of 25 lakh rupees or more have to register for GST in India. Small lending entities are exempt from obtaining tax registration, which reduces the operational costs of these NBFCs.

GST Charges on NBFC Expenses

The major expenses of the NBFCs that are paid for the distribution of financial products are as follows:

  • Interest and discount expenses
  • Employee benefit expenses
  • Interest and discount expenses
  • Branch setup and construction costs
  • Infrastructure costs (such as lease rental, call centre charges, shared services etc.
  • Commission expenses

The expenses related to interest and employee benefits do not come under GST. However, the reimbursements made to the employees are liable for GST, so the NBFC must check these expenses carefully. For example: if the employee pays for hotel stays or other expenses then the NBFC must quote their GSTIN and name on the bills instead of those of the employees.

Conclusion

The GST had a major impact on the operations of NBFCs, and it is also true that GST has provided several benefits to NBFCs. The complex taxation process was a challenge for the NBFCs operating in India. After the implementation of GST, the government removed indirect taxes across India. Now the NBFCs have clear rates of GST on their different services. If you are looking to file the GST return filing, then reach out to Registrationwala. We help you in filing the GST return online, and get the final confirmation receipt. 


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