Taxability of Loan Transactions Between Overseas and Indian Affiliates.

 INTRODUCTION: -

The Goods and Services Tax (GST) applicability on transactions of providing loans between overseas affiliates and Indian affiliates, or between related persons, has raised concerns within the trade and industry. Specifically, clarity has been sought on whether such loan transactions, where consideration is only represented by way of interest or discount, would attract GST. This article provides a clear understanding of the taxability of these transactions based on the provisions of the Central Goods and Services Tax (CGST) Act, 2017.

 

LEGAL PROVISIONS AND CLARIFICATION: -

1.     Supply of Goods or Services Between Related Persons:

·       As per Section 7(1)(c) of the CGST Act, read with Schedule I (S. No. 2 and S. No. 4), any supply of goods or services between related persons made in the course or furtherance of business is considered a supply, even if made without consideration.

·       Therefore, the provision of loans/advances between an overseas affiliate and an Indian affiliate or between related persons qualifies as a supply of service under GST, even if there is no consideration other than interest or discount.

 

2.     Exemption of Services Where Consideration is Represented by Interest or Discount:

·       Entry 27(a) of Notification No. 12/2017-Central Tax (Rate) exempts services by way of extending deposits, loans, or advances, as long as the consideration is only in the form of interest or discount.

·       Hence, when the consideration for a loan is represented solely by interest or discount, the supply of the loan service is fully exempt from GST.

 

3.     Clarification on Processing Fees or Other Charges:

·       Loan-related fees such as processing fees, administrative charges, or service fees are considered taxable under GST as they constitute a charge for facilitating the loan. This is clarified in the Sectoral FAQ on Banking, Insurance, and Stock Brokers Sector issued by CBIC.

·       Independent lenders charge these fees to cover administrative costs. Such fees, if levied, are subject to GST, unlike the interest or discount portion of the loan, which is exempt.

 

WHAT THIS MEANS FOR LOANS BETWEEN RELATED PARTIES: -

1.     No Additional Fees, No GST:

·       When one related company (e.g., an overseas affiliate) lends to another (e.g., an Indian affiliate), and no additional fees are charged besides the interest, there is no GST applicable.

·       Unlike independent lenders, related companies may not need to perform the same detailed checks (like credit risk assessments) or charge for them because they already have access to financial information within the group. Thus, there are no extra costs to recover.

 

2.     GST on Additional Fees:

·       However, if the lender charges any fee in addition to interest, such as processing or administrative fees, this will be considered a taxable service and will attract GST.

·       In other words, GST is only charged on any extra service provided beyond the loan itself, like paperwork processing or credit checking.

 

CONCLUSION: -

·       The transaction of providing loans between overseas affiliates and their Indian affiliates, or between related persons, where consideration is represented only by interest or discount, is not subject to GST. However, if any other charges, such as processing fees or administrative fees, are levied, these would attract GST as a supply of service. This clarification ensures uniformity in the application of GST laws across different field formations, easing compliance for businesses engaged in inter-affiliate or related-party transactions.