GST on Lending Transactions: One of the primary facts one should note while evaluating the applicability of GST is the nearly-all-pervasive nature of the levy. The charging section [Sec 9 of the CGST Act] imposes the tax on any “supply”. Exclusions are items like non-taxable supplies [for example, alcohol for human consumption], or exempt supplies, or supplies which are zero-rated. Hence, the focus shifts to the ambit of the word “supply”, which consists of all forms of supply of goods and services [sec 7 (1) of CGST Act]. Since the word is intrinsically connected with the words “goods” and “services”, one needs to examine the meaning of those terms.

GST on Lending Transactions

GST on Lending Transactions

GST on Lending Transactions

“Goods” are defined in sec. 2 (52) to include any movable property, other than money and securities. “Services” are defined in sec. 2 (102) to mean “anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.”

Mere money is excluded from both “goods” as well as “services”. When read with the word “supply”, supply of money is neither a supply of goods, nor a supply of services. However, sec. 2 (102) includes, in the definition of “service”, any activity relating to use of money, even though supply of money itself is not a service. Mere supply of money could be settlement of a transaction – for instance, making a payment for goods and services. It could not have been argued that the person making the payment itself is making a supply. Therefore, the intent of the law excluding supply of money, but including any activity pertaining to the use of money becomes intriguing. This conundrum was faced by the Delhi High Court in Delhi Chit Fund Association vs Union of India1 while interpreting similar expression used in sec 65B (44) of the Finance Act, 1994 – the High court expressed its perplexity in the following words: “The Explanation, therefore, seems to offer a clue to the problem which appears to us to be a creation of the very confounding manner in which the definition is found to have been drafted. However, we have to make sense of what we have”.

Can it, therefore, be argued that lending of money is an activity pertaining to use of money? If the settlement of a supply in form of a monetary payment cannot itself be taken to be a supply, then, what else could be the exclusion of monetary transactions in both the definition of “goods” as well as “services”, except lending or deposit of money?

The discussion may seem academic because the list of exempted services [item 8- extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services)]. That is to say, there is a clear exemption for extending of deposits, loans or advances, insofar as the consideration is interest or discount. Therefore, it does not practically matter whether lending of money is a supply of services or not. However, the question becomes crucial from at least 2 viewpoints:

  • Lending of money is a supply of service, but an exempt service in terms of Item 8 of Exemption list;
  • Interest involved in credit cards is not a fully exempt service

The essence of the Delhi High court ruling in Delhi Chit Fund Association was that exempting something that was not even included in the ambit of the law does not have much meaning. However, the question whether moneylending is itself a supply of service at all, will continue to engage courts for some time to come.


The exemption for financial transactions in India is quite narrow – it is only the interest/discount earned or paid for loans, deposits or advances2 . Therefore, if the transaction deviates from a plain vanilla structure and therefore, fails the test of being a “loan”, “deposit” or “advance”, or the consideration is not an interest or discount, the exemption is lost. As a result:

  • All earnings and charges other than interest or discount3 will be chargeable to GST. This includes any upfront or regular charges such as processing fees, documentation charges, service charges, collection charges, inspection charges, repossession charges, foreclosure or prepayment charges4 , and so on.
  • If the transaction does not fit into the meaning of “loan”, “deposit” or “advance”, even if the transaction is intrinsically a financial transaction, it does not seem that the supply will be exempt from GST. Thus, if an inventory repurchase transaction or a financial lease transaction may have the substance of a financial transaction, but it will be difficult to contend that they avail the exemption given in Item 8 of the Exemption list.
  • Nevertheless, if the transaction is a loan transaction, there is no question of GST on the recovery of principal lent, as the tax can only be on the consideration, and not for principal recovery.

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