Waiver of Loan - GST Perspective

Introduction

1. A 'loan waiver' is the waiving of the real or potential liability of the person or party who has taken a loan through the voluntary action of the person or party who has taken loan. In contrast to loan waiver there is also a concept of 'loan write off' wherein the loan is removed from the Balance

Sheet, however right to collect the amount from borrower still exists.

In the month of April this year, the Central Government told the Parliament that non-performing assets (NPAs) worth Rs. 2.41 lakh crore have been written off from the books of public sector banks between April 2014 and September 2017. Since the banks were able to recover only 11% of the distressed loans worth Rs. 2.7 lakh crore within the stipulated time, the rest had to be written off as per regulations. The Government, however, clarified that the defaulters will have to pay back the loans, though they were written off. So, a write-off is technically different from a loan waiver in which the borrower is exempted from repayment. This, of course, does not mean that banks will manage to collect the dues from defaulting borrower.

After understanding the term 'loan waiver' let us now examine whether there are any GST implications on waiver of loan?

GST implications of loan waiver

2. The waiver of loan may comprise of the waiver of the principal amount of the loan, interest amount accrued on such loan and any income recoverable on such loan. Let us discuss GST implications of each of these amounts.

2.1 GST implication on principal amount of loan waived of - GST is a tax on supply of goods or services or both. The term supply has been defined in a very broad manner under Section 7 of the CGST Act, 2017. Further, the expression 'goods' has been defined in Section 2(52)of the CGST Act, 2018 and term 'services' has been defined in Section 2(102) of the CGST Act, 2018. Under both the said definitions 'money' has been excluded and, therefore, transactions in money are not exigible to GST.

Accordingly, when a loan is extended by the bank/other lender to any person, GST will not be applicable on such transaction as it is a transaction in money. On similar analogy, GST will also not be applicable when the loan amount is repaid by the borrower as it would also be a transaction in money.

Now the question before us is that in case such loan amount is voluntarily waived off by the Bank/other lender whether there would be any GST implication?

As per Section 7(1)(a) of the CGST Act, 2017 'supply' includes all forms of supply of goods or services or both made or agreed to be made for a consideration by a person in the course or furtherance of business. Accordingly, presence of consideration is must for any transaction to be regarded as supply, except in situations provided in Schedule I of the CGST Act, 2017. In cases where the loan amount is waived off by the Bank/other lender, there will be no flow of consideration to such lender; rather in such cases the amount recoverable is waived off. Consequently, such waiver would not be treated as supply and, thus, will not be subjected to GST.

2.2 GST implication on waiver of interest accrued on loan - As per entry 27 of Notification No. 12/2017-Central Tax (Rate), dated 28-6-2017 services by way of extending deposits, loans or advances, in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services) are exempted and, thus, GST is not applicable on interest on loan.

Now, let us discuss whether waiver of interest on loan recoverable will be subject to GST or not?

As discussed in preceding para, presence of consideration is a must for any transaction to be regarded as supply, except in situations provided in Schedule I of the CGST Act, 2017. In cases where the interest amount recoverable is waived off by the Bank/other lender, there will be no flow of consideration to such lender; rather in such cases the amount recoverable is waived off. Therefore, waiver of interest on loan would not be treated as supply and, thus, will not be subjected to GST.

2.3 GST implication on waiver of service fee and other charges on loan - As discussed in the preceding para, interest on loan is not subject to GST, it being an exempted supply.

The expression 'Interest' has been defined in the Explanation (zk) to paragraph 2 of Notification No.12/Central Tax (Rate) dated 28-6-2017 as under:

'"interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.'

In view of above definition, it is evident that the expression 'interest' does not include service fee and other charges recovered by the bank/lender from the borrower. For example, at the time of filing of loan application, processing fee is charged by lender from the applicant/borrower, which is not covered under the definition of interest as stated supra and thus will be subjected to GST.

As per Section 13(2) of the CGST Act, 2017 the time of supply in case of supply of services is the date of invoice (date of provision of service if invoice not issued within prescribed time) or date of payment, whichever is earlier. Thus, in case the Bank/other lender has issued invoice for service fee/other charges and payment against same has not been received, the time of supply will be attracted and such bank/lender will be required to deposit GST thereon.

Subsequently, in case payment is not received from the borrower in respect of such fee income and the amount recoverable in the books (including GST) towards the same is waived off by lender. In regard to above situation, following two questions emanate and need to be answered in light of GST law.

2.3-1 Whether supplier can avail of adjustment of tax paid on fee income upon waiver of such income? - As per GST law in regard to supply of services, adjustment of tax paid earlier on any supply is possible by issue of credit note. As per Section 34(1) credit note can be issued only where the taxable value or tax charged in tax invoice is found to exceed the taxable value or tax payable or where the services are found to be deficient. Normally, the waiver of service fee and other charges are made where payment of such charges is not being received and, therefore, none of two situations where credit note can be issued is fulfilled and, thus, credit note cannot be issued in such a case. Accordingly', adjustment of GST earlier paid on amount of fee which is now being waived, cannot be made. It is pertinent to mention here that there are no provisions in GST law for providing any relief in regard to bad debts. Therefore, in case any amount on which GST is paid is not recovered and written off in books, no adjustment can be availed in respect of such GST paid which will be sunk cost for the supplier.

2.3-2 Whether GST would be levied on waiver of such fee income treating it as independent supply? - As discussed in preceding paras, presence of consideration is a must for any transaction to be regarded as supply. In cases where the service fee and other charges recoverable from borrower are waived off by the Bank/other lender, there will be no flow of consideration to such lender; rather in such cases the amount recoverable is waived off. Therefore, waiver of service fee and other charges would not be treated as supply and, thus, will not be subjected to GST.

Concluding Remarks

3. The waiver of principal amount of loan, interest accrued on loan as well as service fee and other charges will not be exigible to GST as there is no flow of consideration upon waiver to the Lender in such cases. Further, no adjustment will be admissible in respect of GST paid by the Lender on service fee and other charges, where such fee/charges have subsequently been waived off by the lender due to non-receipt of payment from the borrower.