The fitment committee under the Goods and Services Tax (GST) Council has established a clear tax framework for non-banking finance companies (NBFCs) providing services to banks in co-lending arrangements. According to reports from The Economic Times, the committee decided that services provided by NBFCs to banks will be taxable at 18% GST, with their value determined in the manner prescribed by the Reserve Bank of India (RBI). The interest on the underlying loan will remain exempt from GST, applying only to the taxable service supplied by the NBFC to the bank in co-lending arrangements. This decision addresses long-standing industry queries about whether an NBFC's income or spread in such arrangements should be treated as interest - which is exempt - or as consideration for a separate service.
The committee has decided to align the valuation of the NBFC's service with the methodology prescribed by the Reserve Bank of India, as reported by The Economic Times. This regulatory benchmark provides a clear framework for determining the taxable component and reduces scope for different interpretations across co-lending structures. The fitment committee suggested this after proper deliberation with stakeholders, with a separate circular to be issued if the proposal is cleared by the GST Council. This regulatory alignment will make it easier for lenders and fintech platforms to structure partnerships without prolonged disputes over valuation.
The clarification addresses significant litigation and confusion surrounding the taxability of this rapidly expanding lending model, according to The Economic Times. Under the co-lending model, banks and NBFCs jointly fund loans, with the NBFC generally bringing its customer acquisition and credit assessment capabilities, while the bank provides a larger share of the financing. The arrangement has been particularly important for extending formal credit to segments where banks have traditionally had limited reach. Currently, interest from co-lending business is shared in a predefined ratio, with the NBFC retaining the remaining percentage after the bank's share is distributed. For instance, if a co-lender charges a blended rate of interest of 16% to the customer with the bank entitled to receive 10% on its share, the remaining 6% received from the customer on the bank's share of the loan is retained by the sourcing NBFC.
The council has separately proposed that notional charges recorded when banks transfer funds between their own branches be treated as interest, aligning GST treatment with the substance of the transaction, as reported by The Economic Times. This regulatory benchmark will make it easier for lenders and fintech platforms to structure partnerships without prolonged disputes over valuation. The GST Council is scheduled to meet on October 8 to discuss the next wave of reforms, with this decision part of wider measures to resolve long-standing tax ambiguities in the financial services sector and other key sectors, as well as to align GST treatment more closely with the regulatory framework.
