Loan granted to credit card holder is exempt from IGST: Calcutta HC

Interest on loans exempt from IGST but provision is not available to credit card services, says government notification

The interest charged on an inter-state loan given to a credit card holder without the use of a plastic card would not be subject to the integrated goods and services tax (IGST), a two-judge bench of the Calcutta High Court has ruled.

In this connection, it recently set aside a ruling by a single judge of the High Court.

The issue was a loan of Rs 650,000 granted by Citi Bank with an EMI of Rs 58,056 for 12 months and inclusive of integrated GST (IGST) on each installment of interest. This kind of loan was not offered by the bank to anyone who is not its credit card holder. IGST was charged because the loan was granted by the Tamil Nadu branch of CitiBank to a resident of Kolkata, making it an inter-state transaction.

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Challenging the IGST levy, the loanee argued that even though possession of the credit card entitled him to the loan but advancement of loan had nothing to do with the credit card. He contended that it was an independent agreement where the bank offered the loan, interest charged on the loan was not for use of the credit card, and installment amount was reflected in the credit card statement only for the purpose of payment of EMI.

A single-judge bench of the high court had ruled that the interest component of EMI is not exempt from IGST. The court had held that the services rendered by the bank by way of extending the loan amounted to credit card services.

According to a notification issued by the government in 2017, interest on loans is exempt from IGST but that exemption is not available to credit card services.

The loanee argued that the bank cannot treat the interest on loan as credit card service charge on which IGST can be imposed.

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The bank argued that after accepting the condition of paying IGST at the time of taking the loan, the loanee cannot retreat.

However, the two-judge bench said accepting a condition prohibited by law does not make it legally enforceable.

The court said the government notification in 2017 does not include loans given to a credit card holder as credit card service.

The court said any exceptions made with regard to the category of loan, namely credit card holder or other borrowers, will go against the letter and spirit for which loan schemes are made. It will also violate Articles 14 and 21 of the Constitution. A banking institution has a discretion whether to give loan to a credit card holder but once it chooses to grant loan to him it has to treat the loan similar to other types of loan. It cannot treat the same as credit card facility and charge GST on it.

The court observed that if the loan was advanced to the appellant through use of the card, then one could have understood that the service was related to the card.

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The court directed the GST authorities to immediately refund the IGST to the bank, which in turn will refund the amount to the loanee within three months. 

Sandeep Sehgal, partner-tax at AKM Global, said the interpretation taken by the tax authorities would have potentially created a substantial burden on such small ticket loans and could have also affected various fintech companies operating in similar areas.