The GST Council is set to discuss an 18% tax on service fees charged by NBFCs to partner banks under co-lending models at the October 8 meeting. While interest income remains exempt, this proposal aims to resolve tax disputes by aligning valuation with RBI norms. Investors should track how this impacts NBFC margins and compliance costs.
The GST Council is expected to address the tax treatment of co-lending arrangements at its 57th meeting scheduled for October 8, 2026. The fitment committee has recommended an 18% Goods and Services Tax (GST) on the service fees earned by non-banking finance companies (NBFCs) when they partner with banks to issue loans. This proposal aims to provide regulatory clarity on a structure that has been a significant point of contention for years.
In a typical co-lending model, banks provide the bulk of the capital, while NBFCs handle customer sourcing, credit assessment, and collection. The core issue for tax authorities has been whether the revenue shared with the NBFC—often described as a profit spread—constitutes interest income, which is exempt from GST, or payment for a taxable service like loan processing.
The proposed framework clarifies that while the interest component on the underlying loans will remain tax-exempt, the specific service fees charged by the NBFC for originating and managing the loan will attract an 18% tax. The proposal also mandates that the valuation of these services must align with the methodology prescribed by the Reserve Bank of India (RBI). This move is intended to stop inconsistent tax interpretations that have historically led to litigation between lenders and tax authorities.
For investors, this clarity is a step toward reducing legal uncertainty. However, it introduces a new operational cost. NBFCs will need to determine if they can pass on this 18% tax burden to their partner banks or if it will put pressure on their net interest margins. If companies have to absorb this cost, it could affect the profitability of their co-lending portfolio.
Operational adjustments are also expected. Aligning internal accounting and tax reporting with the new RBI-based valuation methodology will likely require updates to internal IT and financial systems. The final impact on the financial health of NBFCs will depend on the specific guidelines in the upcoming circular. Investors should track the official announcement following the GST Council meeting for any potential transition periods or specific exemptions that could mitigate the immediate compliance burden.