The Central Board of Indirect Taxes and Customs has clarified GST norms, allowing used car dealers to claim Input Tax Credit on operational expenses. Additionally, the regulator has confirmed that co-lending services provided by NBFCs to banks are taxable, aiming to streamline compliance in both sectors.
The Central Board of Indirect Taxes and Customs (CBIC) has issued fresh guidelines to resolve tax ambiguities in the automotive and credit sectors. These circulars, stemming from recent GST Council recommendations, aim to simplify compliance and provide clarity for businesses operating under specific tax models.
ITC Relief for Used Car Dealers
For many used car retailers, the GST margin scheme is the standard way to calculate tax. Under this method, GST is applied only to the difference between the selling price and the purchase price of the vehicle, rather than the total transaction value. Previously, there was uncertainty about whether these dealers could claim Input Tax Credit (ITC)—a mechanism that allows businesses to reduce their tax liability by the amount of GST paid on their own business-related purchases—for non-vehicle expenses.
The new guidance explicitly allows dealers to claim ITC on service-related inputs. This includes expenses such as vehicle repairs, routine maintenance, marketing campaigns, and technology services. However, the government has maintained that no ITC can be claimed on the purchase of the second-hand vehicles themselves. By removing the confusion around operational expenses, this update helps organized used-car players reduce their cost burden and improves the efficiency of their tax filings.
Taxing Co-Lending Arrangements
In the financial services sector, the CBIC has addressed the tax status of services rendered by Non-Banking Financial Companies (NBFCs) to partner banks under co-lending arrangements. Co-lending has become a common strategy where banks provide a significant portion of the capital at a lower interest rate, while NBFCs leverage their last-mile reach to originate loans, perform KYC, and manage collections.
The regulatory body has confirmed that these intermediary services provided by an NBFC to a bank are taxable under the GST framework. The taxable value for these activities will be calculated based on the service fees agreed upon in the contracts between the two parties. By classifying these specific activities as taxable services, the regulator seeks to remove ambiguity and prevent tax leakage. This move forces standardized accounting for fees within the co-lending ecosystem, ensuring that both banks and NBFCs align their compliance with the clear tax treatment defined by the board.
These updates are effective immediately. For investors and stakeholders, the next monitorable will be how companies adjust their internal accounting and service agreements to comply with these tax definitions. While the auto sector sees a potential reduction in operational tax costs, the finance sector will need to ensure that the newly defined taxable service fees are clearly accounted for to avoid potential compliance gaps in the future.