Banks Seek Clarity on GST Applicability on Penal Charges and Request More Time for Implementing Customer Consent Rules for Marketing Communications
By: Admin
June 26, 2024
Categories: GST Recent News
4 Min Read
The new policy implemented by the Reserve Bank of India (RBI), which prohibits banks from imposing ‘penal interest’ and instead, only allows ‘penal charges’, is causing a tax conundrum for banks. Banks are concerned that these ‘penal charges’ may be subject to goods and services tax (GST), unlike interest rates which are exempt. This issue was raised by banks to the tax authorities last month, according to two senior industry officials.
The compounding of penalties is another concern under accrual accounting, where the tax may be paid before the amount is collected from customers. In many cases, banks may not be able to recover the extra tax paid to the government, especially if the penalty is subsequently reduced following negotiation with the customer, or if the loan account becomes a non-performing asset with the borrower having stopped paying even the regular interest.
The new rule was introduced over a year ago and came into effect on April 1, 2024, with the aim of ensuring ‘reasonableness and transparency’ in the disclosure of penal interest. The RBI believes that such charges should not be used as a revenue enhancement tool over and above the contracted rate of interest.
Although it is established law that foreclosure charges by banks and NBFCs on premature termination of loan are not subject to service tax, and the same legal position holds under GST, banks still seek clarity from the government. Similarly, additional/penal interest levied on the delay in payment of EMI is also not subject to GST, as clarified by the Board in its circular dated June 28, 2019. However, the shift from ‘interest’ to ‘charges’ has left banks uncertain about how it would be interpreted by GST authorities.
In another matter, the banking industry recently requested the Telecom Regulatory Authority of India (Trai) to give them ample time before making it mandatory to obtain customer consent before sending marketing calls and text messages. This move aims to curb ‘unsolicited commercial communications’. While specific account-related messages and alerts will continue, consent must be obtained from each account holder for marketing offers like personal loans, pension products, home loans and FDs. Banks are unclear about how to proceed with this, as these calls, texts, and emails are their main channels for marketing products and cross-selling. They fear that many customers may opt out of these communications, posing a challenge for retail banking teams. Banks feel they need more time to figure out a new marketing strategy and make the transition.
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