No GST on Penal Charges levied by Banks on Borrowers: FM

Finance Minister Nirmala Sitharaman stated on Saturday that the Goods and Services Tax (GST) would not be collected on penal charges imposed on borrowers by banks or financial institutions.

Union Finance Minister Nirmala Sitharaman presided over the 55th meeting of the GST Council in Jaisalmer.

Penal charges are costs levied by banks on borrowers for failing to comply with loan terms, such as missing an EMI payment or breaching repayment schedules.

These charges are frequently imposed to prevent such defaults and do not constitute a direct supply of services.

Previously, it was unclear whether such charges should be considered as a service under the GST Act, making them taxable. This ambiguity led to diverse interactions.

Following extensive study, the GST Council determined that penal charges do not constitute as consideration for a service under the GST framework.

The consequences could be that banks are no longer required to account for GST on penal charges. Furthermore, the borrowers are exempt from paying GST on penalties that are already punitive in nature.