GST on Interest component of Loan EMI

[Shivang Sharma]

The definition of Services under CGST Act specifically excludes money but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Banks are charging GST on Processing charges, etc as they are activities in relation to use of money, which is correct. But they are also charging GST on interest component of loan EMI's. The point here is interest charged by Banks is only for the 'use of money' and 'use of money' is not a service as per the definition of Services. The Service only includes 'activities in relation to use of service...'.

Keeping in view the above definition, I want to understand why Banks are charging GST on interest component of EMI's.

AI Summary

Debate on GST applicability to loan interest under CGST Act: Experts say GST applies only to penalty charges. A discussion on a forum addressed whether Goods and Services Tax (GST) should apply to the interest component of loan EMIs. The original query highlighted that the definition of services under the CGST Act excludes the use of money, questioning why banks charge GST on loan interest. Various participants, including experts, responded, generally agreeing that GST should not apply to interest unless it relates to penalties for delayed payments. They emphasized that GST is applicable to bank charges but not on the interest itself, unless it is a penalty for late payments. The discussion sought clarity on the banks' practices.