1. Introduction
A ‘loan waiver’ is the waiving of the real or potential liability of the person or party who has taken out a loan through the voluntary action of the person or party who has made loan. In contrast to loan waiver there is also a concept of ‘loan write off’ wherein the loan is removed from the Balance Sheet, however right to collect the amount from borrower still exists.
We may recollect that in April, 2020 end the issue of loan waiver was raised by the Opposition parties wherein they were claiming that the Government has waived Rs 68,607 crore of the top 50 bank loan defaulters, citing an RTI reply from the Reserve Bank of India (RBI). The Government, however, clarified that upon full provisioning being done, banks write-off the fully provided NPA but continue to pursue recovery against the borrower. Further it was stated by Government that no loan is waived off.
From above, it can be inferred that a write-off is technically different from a loan waiver as in case of write-off, recovery process is on, whereas in case of waiver the borrower is exempted from repayment. This, of course, does not mean banks will be able to collect the dues from defaulting borrower.
After discussing briefly on the term ‘loan waiver’ let us now examine whether there are any GST implications on waiver of loan in light of the provisions of GST Law.
2. GST implications on loan waiver
The waiver of loan may comprise of the waiver of the principal amount of the loan, interest amount accrued on such loan and any fee income recoverable on such loan. Let us discuss GST implications of each of these amounts in the succeeding paras.
2.1 GST implication on principal amount of loan waived
GST is a tax on supply of goods or services or both. The term supply has been defined in a very broad manner under Section 7 of the CGST Act,2017.Further the expression ‘goods’ has been defined in Section 2(52) of said Act and term ‘services’ has been defined in Section 2(102). Under both the said definitions ‘money’ has been excluded and therefore transactions in money being not a supply are not exigible to GST.
Accordingly, when a loan is given by the bank / other lender to any person, GST will not be applicable on such loan transaction as it is a transaction in money. On similar analogy, GST will also not be applicable when the loan amount is repaid by the borrower as it would also be a transaction in money.
Now the question before us that whether there would be any GST implication if any loan amount is waived off voluntarily or due to non recoverability by the Bank / other lender.
As per Section 7(1)(a) of the CGST Act,2017 ‘supply’ includes all forms of supply of goods or services or both made or agreed to be made for a consideration by a person in the course or furtherance of business. Accordingly, presence of consideration is must for any transaction to be regarded as supply except in situations provided in Schedule I of the CGST Act,2017.
In cases where the loan amount is waived by the Bank/ other lender, there is no flow of consideration to such lender, rather in such cases the amount of loan recoverable by Bank is waived. Consequently, such waiver would not be treated as supply and thus same will not be subjected to GST.
2.2 GST implication on waiver of interest accrued on loan
As per entry 27 of Notification No. 12/2017-Central Tax (Rate), dated 28-06-2017 services by way of 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) are exempted and thus GST is not applicable on interest on loan.
Now let us discuss whether waiver of interest on loan recoverable will be subject to GST or not.
As discussed in preceding Para, that presence of consideration is must for any transaction to be regarded as supply except in situations provided in Schedule I of the CGST Act,2017. In cases where the interest amount recoverable is waived by the Bank/ other lender, there will be no flow of consideration to such lender, rather in such cases the amount recoverable is waived. Therefore, waiver of interest on loan will also not be treated as supply and thus will not be subjected to GST.
2.3 GST implication on waiver of service fee and other charges on loan
As discussed in the preceding para that waiver of interest on loan is not subject to GST. Now let us discuss about the GST implications on waiver of service fee and other charges on loan.
In this regard it is important to note that the expression ‘Interest’ has been defined in Explanation (zk) to paragraph 2 of Notification No.12/Central Tax (Rate) dated 28-06-2017 as under:
“interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.
In view of above definition, it is evident that the expression ‘interest’ does not include service fee and other charges recovered by the bank / lender from the borrower. For example at the time of filing of loan application, processing fee is charged by lender from the applicant / borrower, which being not covered under the definition of interest as stated supra, will be subjected to GST.
It is submitted that as per Section 13(2) of the CGST Act, 2017, the time of supply in case of supply of services is the date of invoice (date of provision of service if invoice not issued within 45 days (for Banks, FIs, NBFCs) or date of payment whichever is earlier. Thus, in case the Bank / other lender has issued invoice for service fee / other charges the time of supply will be attracted and such bank / lender will be required to deposit GST thereon despite that fact that payment against same has not been received,
Now subsequently, there may be a case that payment is not received from the borrower in respect of such fee income and the amount recoverable in the books (including GST) towards the same is waived by lender. In regard to above situation, following two questions emanate and needs to be answered in light of GST law.
2.3-1 Whether supplier can avail adjustment of tax paid on fee income upon waiver of such income?
As per GST law in regard to supply of services, adjustment of tax paid earlier on any supply is possible by issue of credit note. As per Section 34(1) of the CGST Act, 2017, credit note can be issued only where the taxable value or tax charged in tax invoice is found to exceed the taxable value or tax payable or where the services are found to be deficient. Normally the waiver of service fee and other charges is made where payment of such charges is not received due to inability of borrower to pay etc and therefore none of two situations where credit note can be issued, is fulfilled and thus credit note cannot be issued in such a case.
Accordingly, adjustment of GST earlier paid on amount of fee which is now being waived, cannot be made. It is pertinent to mention here that there are no provisions in GST law for providing any relief in regard to bad debts. Therefore, in case any amount on which GST is paid is not recovered and written off in books, no adjustment can be claimed in respect of such GST paid which will be sunk cost for the supplier i.e. lender.
2.3-2 Whether GST would be levied on waiver of such fee income treating it as independent supply?
As discussed in preceding paras that presence of consideration is must for any transaction to be regarded as supply. In cases where the service fee and other charges recoverable from borrower are waived by the Bank/ other lender, there will be no flow of consideration to such lender, rather in such cases the amount recoverable is waived. Therefore, waiver of service fee and other charges would not be treated as supply and thus will not be subjected to GST.
3. Concluding Remarks
The waiver of principal amount of loan, interest accrued on loan as well as service fee and other charges will not be exigible to GST as there is no flow of consideration upon waiver, to the Lender in such cases. Further no adjustment will be admissible in respect of GST paid by the Lender on service fee and other charges, where such fee / charges have subsequently been waived by the lender due to non-receipt of payment from the borrower.
***
[rainbow]Don’t miss the next GST Update / Article / Judicial pronouncement[/rainbow]
Subscribe to our newsletter from FREE to stay updated on GST Law
Resolve your GST queries from national level experts on GST free of cost.
Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
