The Central Board of Indirect Taxes and Customs (CBIC) has clarified that GST will not be applicable to penal charges levied by banks and NBFCs, as these charges are deemed as breaches of contract. Furthermore, Payment Aggregators will be exempt from GST for transactions up to Rs 2,000, though Payment Gateway services are excluded from this exemption.
The Central Board of Indirect Taxes and Customs (CBIC) has clarified that no Goods and Services Tax (GST) will be levied on penal charges imposed by banks and Non-Banking Financial Companies (NBFCs). This decision comes after the Board noted that these charges are considered breaches of contractual terms and therefore fall outside the GST framework.
In its statement, the CBIC explained that the penal charges charged by regulated entities, such as banks and NBFCs, are in the nature of penalties for non-compliance with contract terms. The clarification follows the recommendation of the 55th GST Council, which stated that these charges are not subject to GST.
This announcement aims to resolve confusion regarding the GST treatment of penalties imposed by financial institutions, ensuring a clear understanding of tax rules in this sector. Additionally, the CBIC further clarified the GST exemption for Payment Aggregators (PAs) for transactions not exceeding Rs 2,000. However, it specifically pointed out that Payment Gateway services are not included under the exemption.
The move comes in response to concerns from businesses and financial entities regarding the tax implications on payment processing and penalty charges. As businesses and customers rely increasingly on digital payments, the clarity from the CBIC is expected to provide ease of operations for payment aggregators and financial service providers across the country.
The CBIC’s decision reflects the growing complexity of taxation as the economy shifts towards more digital and automated financial transactions.
