Finance companies ask RBI not to rename penal interest as `charges’ to avoid attracting GST

The Finance Industry Development Council, a representative body of NBFCs in India, has requested the Reserve Bank of India (RBI) not to classify penal interest as ‘charges’ due to potential tax implications.
In a representation to the RBI, the FIDC said the central bank’s circular on fair lending practices, which included guidelines on the reasonable and transparent disclosure of penal interest or charges, could create problems.
The association highlighted several challenges, such as the risk of levying GST on penal charges, which could create further hardships for customers already in default.
The FIDC also noted that penal interest is a deterrent for non-compliance and default . The council letter signed by director general Mahesh Thakkar said that “Adjusting the credit risk premium can be considered when there is a significant drop in risk profile and the same can be implemented post detailed review of profile on various parameters whereas penal interest can be levied from the date of default which curbs the borrower to delay unnecessarily”.