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No GST on penal fees for loan non-compliance, says finance ministry

The RBI in its circular had directed regulated entities to replace "penal interest" with "penal charges" for borrowers who fail to comply with loan terms

CGST Act set to see key amendments in Budget session
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Monika Yadav Delhi

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The Ministry of Finance on Tuesday notified that penal charges imposed by banks and non-banking financial companies (NBFCs) for non-compliance with loan terms will not attract an 18 per cent goods and services tax (GST).
 
The 55th GST Council meeting addressed this issue after receiving representations seeking clarity on the applicability of GST following the Reserve Bank of India’s (RBI’s) directive issued on August 18, 2023, which said that the use of “penal interest for non-compliance with loan terms” should be discontinued.
 
In its circular, the RBI directed regulated entities to replace “penal interest” with “penal charges” for borrowers who

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