Is GST under RCM applicable on Borrowing Cost?.

Some GST officials attached to Audit function under GST law in Tamil Nadu make our life interesting by way of novel methods in raising fictitious demands. One such issue was discussed on 25/09/2026 under how to raise vitiated, unsustainable as well as untenable demand in GST covering demand of GST on entire trade payables as on 31/03/2023 as per audited balance sheet assuming that the entire creditors are due for mor than 180 days when the trade payable represented only 25 days purchases. This issue is no more res-integra as Madras High Court has already settled this issue on 12/01/2024 itself in the matter of Ingram Micro India Pvt. Ltd., Represented by Shri. Rajat Kumar Samal Versus State Tax Officer - 2024 (1) TMI 1103 - MADRAS HIGH COURT.

In the very same show cause notice, a demand is raised for an amount of Rs. 1,67,148 which is exactly 18% on other borrowing cost booked in profit and loss account of Rs. 9,28,600. On examination, it was ascertained that the Bank has charged processing charges amounting to Rs. 1,86,350 on which applicable GST @18% is also charged amounting to Rs. 33,543. As the Banks do not have the practice of issuing GST Invoices, this amount of GST of 33,543, despite being eligible ITC was also booked as bank charges and thus 118% of bank charges was booked as bank charges. When we examined this issue in detail, the amount pertains to loan pre -payment charges as well as other bank charges including fees connected with memorandum of deposit of title deeds (MOD) being amount spent for registering the document at the respective sub-registrar offices. As the bank has not provided any data on these debits made by them, 118% amount of actual expenses were inadvertently booked as expenditure. Thus, a genuine ITC, which was otherwise available was already foregone. As the period relates to financial year 2022-23, it is not possible to avail the ITC now. All the facts were known to the audit and still SCN was issued on 08/09/2026 by one audit office of state tax authorities in Tamil Nadu with instructions to file reply to jurisdictional proper officer by 07/10/2026.

Thus, we have seen two issues so far. This is not the end of that SCN. The directors of the company were paid remuneration on a monthly basis. The total amount paid during the year was 21 lakhs. The ledger scrutiny reveals that these are monthly payments paid to directors who regularly attend the office. Not even a single payment pertains to sitting fees. This fact was furnished to audit and even copy of CBIC Clarification by way of circular during 2020 was submitted. The officer took the stand that as per his understanding, RCM is applicable on all payments to directors, irrespective of the fact as to TDS was done under section 192 or 194J of the Income Tax Act, 1961. We have to see how the proper officer is going to treat this.

The idea of this write is not to criticize any officer as they are all working under severe work pressure. The development in technology and the dependence on technology for administering the GST law with several deadlines in one yeas as last date for SCN, last date for OIO, that too under section 73 as well as 74 puts pressure on their work. The vacancies arising out of retirement of senior officers are also not filled immediately but only once in two or three years. The business is expanding in the State and every day, there are new registrations. The 56th as well as 57th meeting of the GST Council has found some solutions for some of the recurring and long standing issues are addressed.

It is for the taxpayer as well as the tax professionals to put the reply to the show cause notices in such a manner that the reply, even if rejected at adjudication level, is accepted at GSTAT and the OIO gets quashed with consequential relief without any REMAND to adjudication officer. The work of the tax professional is simple now as GSTAT has already passed more than 333 orders already which are periodically updated in e journal of the GSTAT as well. Hence, on all settled issues, the reference may be given by way of page number as well as the link to the website which is https://www.gstat.gov.in/e-journals

Conclusion: Consequent to the operationalization of several benches of GSTAT all over India, the GST litigation is bound to come down substantially in the years to come. I suggest to all the taxpayers and tax professionals to read the show cause notice at least five or six times to find out the number of errors in that show cause notice. A check list as per my experience is as below:

Before parting: It is very clear that the Government of India, Ministry of Finance is not interested in fictitious litigation as they have already set the monetary limits for appeal by Revenue before GSTAT, HC as well as SC which has already started yielding good results. Hence, it is the turn of the adjudicating authorities now to be more updated on all developments including that of 57th GST Council meeting.