FIDC Urges Clarity on GST Exemption for Excess Interest in Co-Lending Model
The Finance Industry Development Council (FIDC), representing non-bank lenders, has formally requested the Central Board of Indirect Taxes and Customs (CBIC) to provide explicit clarification regarding the goods and services tax (GST) treatment of excess interest retained by Non-Banking Financial Companies (NBFCs) in co-lending models with banks.
This appeal comes in response to an ongoing investigation by the Directorate General of GST Intelligence into the co-lending business model adopted by NBFCs and banks. FIDC, in a letter addressed to CBIC chairman Sanjay Kumar Agarwal, emphasized the need for clarity to dispel uncertainties surrounding potential GST evasion allegations.
In co-originating models between banks and NBFCs, the credit is typically contributed in an 80:20 ratio. FIDC explained that the higher interest rates charged by NBFCs in such models are a reflection of their elevated borrowing costs compared to banks. The letter underscored that the excess interest retained by NBFCs does not serve as consideration for any specific activity and, therefore, should be exempt from GST.
Highlighting a specific co-lending model, FIDC drew attention to arrangements where banks structure co-lending as a post-disbursal takeover of their share in the loan, resembling the direct assignment model. In this setup, an NBFC sources borrowers based on predefined credit parameters, and the bank acts as the acquiring co-lender.
Post-disbursement, the bank takes over 80% of the loan, while the NBFC retains 20%. An escrow mechanism is established to collect repayments from borrowers, distributed among co-lenders according to a pre-agreed ratio. FIDC argued that the difference between the blended interest rate charged to the borrower and the interest paid to banks on co-lent loans, known as the "excess interest spread," is merely interest income and should not be subject to GST.
FIDC emphasized that this excess interest spread, being in the nature of interest income, is liable to income tax but is not a fee or charge subject to GST. The letter pointed out that in co-lending arrangements, where both entities collaborate as co-lenders to provide credit, there is no traditional supply of services from one party to another, further supporting the case for GST exemption.
This move by FIDC seeks to provide much-needed clarity in the regulatory landscape, ensuring a fair and transparent treatment of financial transactions in co-lending models, ultimately benefiting the financial industry as a whole.
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