Clarify GST on NBFCs’ co-lending, FIDC asks CBIC

The Finance Industry Development Council (FIDC), a non-bank lender body, has urged the Central Board of Indirect Taxes and Customs (CBIC) to clarify that the excess rate of interest retained by an NBFC in a co-lending model with banks is exempt from goods and services tax.

FIDC sent a letter to CBIC chairman Sanjay Kumar Agarwal after its members reported an investigation of NBFCs and banks by the Directorate General of GST Intelligence to determine whether there was any GST evasion in the co-lending business model adopted by these entities.

Under the co-originating model between a bank and an NBFC, credit is contributed in the ratio of 80:20. In such models, the rate of interest charged by NBFCs is higher than that of banks because the borrowing cost of NBFCs is also higher than that of banks.

Further, the major source of funding for NBFCs is banks thereby adding a layer of intermediation, FIDC said.“The higher rate of interest has no other significance and does not serve as a consideration in any way for any activity offered by the NBFC,” FIDC said.

In the letter, the FIDC highlighted another co-lending model wherein, banks structure the co-lending arrangement as a post-disbursal takeover of their share in the loan on a back-to-back basis. This model is similar to the direct assignment model.