What The RBI Giveth, GST Taketh Away

Model GST law leaves ambiguity over whether interest will come under GST or not 

Indian One Thousand Rupee Banknotes (Photographer: Dhiraj Singh/Bloomberg)
Indian One Thousand Rupee Banknotes (Photographer: Dhiraj Singh/Bloomberg)

The government has been clamouring for a cut in interest rates for some time now. As inflation has eased, the Reserve Bank of India (RBI) has made good on at least part of that demand.

Since the start of 2015, the RBI has reduced its benchmark repo rate by 175 basis points to 6.25 percent. Banks, while slow to pass on the rate cuts, have reduced their lending rates by about 90 basis points. Expectation is that rates in the economy may fall further if the RBI chooses to bring down its policy rates by another 25-50 basis points over the remainder of this financial year and the early part of next year.

Except that it seems the Goods and Services Tax (GST) may take away some part of this benefit. Or actually, all of it and then some.

Defining The Definition

The source of ambiguity is the broad definition of goods and services used in the model GST law.

The model law defines a good as “every kind of movable property other than actionable claim and money but includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under the contract of supply.”
It goes on to define “services’’ as “anything other than goods.”

The model law puts in a brief explanation and says that services include intangible property and actionable claim but does not include money.

It, however, does not explicitly exclude interest from the list of services. This is contrary to the stance under the current taxation system where the service tax negative list clearly excludes interest.

The negative list says that “extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount” will not be subject to service tax.

It is true that the model law does not exclude interest from any definition since a service is defined as anything other than a good. Practically, however, there is no case for making interest taxable. We would expect it to be included in the negative list. 
Jigar Doshi, Partner – Indirect Taxation, SKP Group 

Clarification Key For Financial Services Industry

The clarification is crucial for the banking sector and the economy.

Should GST be charged on interest, the additional cost would most certainly be passed on to the consumer, increasing interest rates in the economy. This, in turn, would undo benefits of the reduction in rates since the start of 2015.

Current Model Law has a broad definition of Services (other than goods) and accordingly by implication one could argue that interest on loans, purchase and sale of securities may get included in the ambit of GST. This would have a far reaching effect on the industry. The transaction costs would increase by atleast a base rate of 12-18%. 
Kalpesh Mehta, Partner, Deloitte Haskins and Sells LLP

Mehta added that the GST council meeting in the first week of November is likely to consider recommendations from the industry regarding clarifications on the coverage of GST.

The global practice, said Mehta, is to exclude interest income from GST and it is expected that India will follow suit.

“However, processing charges, administrative fee and such other levies other than interest could potentially attract GST,” he added.