GST on Penal Charges: Banks Navigate New RBI Directive

Banks are facing uncertainty over the applicability of Goods and Services Tax (GST) on penal charges following a recent policy change by the Reserve Bank of India (RBI). The new directive, effective from April 1, 2024, restricts banks from imposing penal interest, emphasizing transparency in financial penalties instead.

Under the new regulations, banks are concerned that these penal charges may attract GST, unlike exempt interest rates. This has prompted banks to seek clarity from tax authorities to avoid potential tax liabilities that could arise from accrual accounting practices.

Compounding the issue is the challenge of recovering paid taxes if penalties are renegotiated or if loans become non-performing assets. Despite existing clarifications that certain charges like foreclosure fees are exempt from GST, the shift from ‘interest’ to ‘charges’ has created ambiguity.

Meanwhile, banks are also grappling with new regulations requiring explicit customer consent for marketing communications. Aimed at reducing unsolicited messages, the Telecom Regulatory Authority of India (Trai) has mandated that banks obtain consent for promotional calls and texts, excluding essential account alerts.

This shift poses a significant operational challenge for banks reliant on these channels for marketing various financial products. Concerns abound that customers may opt out of marketing communications, impacting cross-selling efforts and necessitating a strategic overhaul in marketing approaches.

Given these complexities, the banking industry has urged for more time to adapt to the new consent requirements, citing the need to devise effective marketing strategies while ensuring compliance.