NBFCs, Banks Agree on 18% GST for Co-Lending Charges as RBI Pushes Model Expansion
In a major development for the financial sector, non-banking financial companies (NBFCs) and banks have reached a consensus to levy 18% Goods and Services Tax (GST) on service charges arising from co-lending arrangements. This GST will likely apply to 0.5%–1% of the total loan amount, according to industry sources.
This agreement marks the end of prolonged discussions between NBFCs and banks on whether a service element exists in co-lending transactions. The move also aligns with the Reserve Bank of India’s (RBI) continued policy push to promote co-lending, especially as the assets under management (AUM) in this space cross Rs.1 lakh crore.
Under the current co-lending model, NBFCs typically contribute 20% of the loan disbursal, while partner banks cover the remaining 80%. NBFCs also handle the sourcing and servicing of the loans. Until now, these companies argued that the additional income they earn—referred to as “excess interest spread”—was purely interest income and not a fee-based service, and hence not subject to GST.
GST Clarity Expected in Upcoming Council Meeting
The final decision on implementing GST on co-lending service charges is expected to be formalized in the next GST Council meeting. Meanwhile, the Department of Revenue has asked the Finance Industry Development Council (FIDC), which represents NBFCs, to propose a minimum charge value in co-lending agreements. This will likely serve as the floor for GST calculations.
