The Finance Industry Development Council (FIDC), a non-banking lender body, has called upon the Central Board of Indirect Taxes and Customs to provide clarity on the exemption of goods and services tax for the excess rate of interest retained by non-banking financial companies in a co-lending model with banks.
The FIDC, in a letter addressed to CBIC Chairman Sanjay Kumar Agarwal, expressed concerns raised by its members regarding an investigation initiated by the Directorate General of GST Intelligence. The investigation aims to assess potential GST evasion in the co-lending business model adopted by NBFCs and banks.
Bank, NBFC Lending Ratios
Under the co-originating model between banks and NBFCs, credit is contributed in an 80:20 ratio, with NBFCs charging a higher interest rate due to their higher borrowing costs compared to banks. FIDC emphasized that the higher interest rate does not serve as consideration for any activity offered by the NBFC.
The FIDC also highlighted another co-lending model where banks structure the arrangement as a post-disbursal takeover of their share in the loan. In this scenario, an NBFC sources the borrower based on predefined parameters, and the bank acts as the acquiring co-lender.
Tax Treatment Concerns
In this model, an escrow mechanism is established post-loan disbursement for collecting repayments, which are then distributed among co-lenders based on a pre-agreed ratio. The excess interest spread, representing the difference between the blended interest rate charged from the borrower and interest paid to banks, is considered "interest income" and is subject to income tax, not GST, according to FIDC.
FIDC argued that in co-lending arrangements, where both entities collaborate to provide credit, there is no traditional supply of services from one party to another. However, the GST department's interpretation of the excess interest spread as a value-added service rather than interest income may lead to potential litigation.
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.
Conclusion
Regulatory clarity will play a pivotal role in shaping collaborative financial models. As technology evolves, ensuring seamless cooperation between banks and NBFCs will be essential to meet the credit needs of emerging sectors. The financial industry's future hinges on adeptly navigating regulatory nuances to promote innovation and accessibility in lending practices.
