GST fitment committee set to review 18% tax on co-lending services

The Fitment Committee of the Goods and Services Tax (GST) Council is set to review the 18 per cent GST on co-lending services, following a report submitted by the State Bank of India (SBI)-led committee on co-lending. The Department of Financial Services (DFS), which had commissioned the report, had submitted a request to the Department of Revenue for a review of the GST on co-lending services, sources said.

 

“The Fitment Committee will determine the extent to which the GST rate should be reduced. There are two possible options: one is a reduction for co-lending activities related to commercial vehicle loans, which could be cut by a few percentage points, and the other is for priority sector-related activities, which could potentially be slashed to zero. However, this decision lies entirely with the committee. Afterward, it will be forwarded to the GST Council," one of the sources added.

 

Last month, Business Standard reported that the SBI-led committee, which was set up to encourage co-lending between commercial banks and non-banking financial companies (NBFCs), recommended the removal of the 18 per cent GST on these services at present. Union Finance Minister Nirmala Sitharaman is expected to meet her state counterparts on December 21-22 for the GST Council meeting in Jaisalmer, Rajasthan, during which the issue may come up for discussion.

 

The Finance Industry Development Council (FIDC), which represents NBFCs, had also argued against the imposition of GST on co-lending activities in a letter to the Central Board of Indirect Taxes and Customs chairman in November last year. "No specific service is being provided by one co-lender to the other within this arrangement. Instead, they collectively provide credit to the borrower, and the interest rate differential reflects their respective roles and risks in the joint operation. Therefore, the excess interest charged by the NBFC in a co-lending arrangement should not be considered a servicing fee subject to GST," the letter stated.

 

Under the co-lending model, NBFCs are required to retain a minimum of 20 per cent of individual loans on their books, while the remaining balance is held by banks.

 

CRISIL Ratings says co-lending portfolios of NBFCs likely to have reached Rs 1 trillion by June 2024, with an annual growth rate of 35-40 per cent in the medium-term.

 

According to a report by PWC India, the co-lending industry lent between Rs 470 and Rs 520 billion in FY23, and is projected to grow fivefold over the next five years, reaching Rs 2,000-2,500 billion. Around 34 per cent of this portfolio is dedicated to personal loans, reflecting strong consumer demand for flexible, unsecured financing options. Home loans account for 20 per cent, indicating significant investment in real estate, while gold loans and unsecured MSME financing make up 13 per cent each. Vehicle financing comprises 12 per cent, with most loans being secured.