Clarification regarding taxability of the transaction of providing loan by an overseas affiliate to its Indian affiliate or by a person to a related person.

Circular No.: 218/12/2024-GST
Date of Circular: 26th June 2024
Relevant Sections and Rules:

• CGST Act, 2017:
  • Section 7(1)(c): Supply between related persons in the course or furtherance of business
  • Schedule I, Sl. No. 2 and 4: Deemed supplies without consideration between related parties
  • Section 15: Valuation of supply
  • Section 168(1): Power to issue instructions
• CGST Rules, 2017:
  • Rule 28: Valuation between related/distinct persons
• Notification No. 12/2017-CT(R): Entry 27(a) – Exemption for services by way of extending loans for interest/discount

Summary of Clarifications Provided:

1. No GST on Loans Between Related Parties or Overseas Affiliates Where Only Interest or Discount is Charged:
   Loans/advances provided by:

• an overseas affiliate to its Indian entity, or
• a person to a related person,
  will not be liable to GST if:
• No processing or administrative fees are charged, and
• The only consideration is in the form of interest or discount.

Such services fall under Entry 27(a) of Notification No. 12/2017-CT(R), which exempts loan, deposit, or advance services where consideration is interest/discount (excluding credit card interest).

2. Clarification on Processing/Administrative Charges:
   If any amount is charged over and above interest/discount—such as:

• Processing fee
• Administrative fee
• Loan granting or service fee
  then it constitutes consideration for a separate supply of services and is taxable under GST.

This aligns with prior CBIC FAQs on banking, insurance, and stockbroking.

3. Related Parties May Not Charge Processing Fees Due to Internal Knowledge or Cost Efficiency:
   Unlike independent lenders, related parties (e.g., group companies) often:

• Already possess relevant financial information,
• Do not conduct separate risk assessments, or
• Do not incur external processing costs.

Hence, no notional GST shall be imposed on such facilitation where no separate fee is charged.

4. Rule 28 and Open Market Value Not Applicable in Absence of Consideration:
   If no fee is charged for loan processing/admin services, deeming a service and applying Rule 28 to determine value is not valid.
   ➤ No GST can be levied just because the parties are related, if interest/discount is the only consideration.
5. Exception – GST Applicable if Additional Fees Charged:
   Wherever any processing or service fee is charged over and above interest/discount, such fees will be treated as taxable consideration for facilitation services, attracting GST liability.

Source: Circular No.: 218/12/2024-GST