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Banks and NBFCs should assess GST for each service in an agreement—not rely on the contract’s heading or a blanket tax clause. Identify the actual supply, who receives it, the applicable tax and payment mechanism, place of supply, invoicing duties and input-tax-credit position; then align the contract’s payment and cooperation terms with those facts.
This is a contract-review framework, not a tax conclusion for a particular agreement. The official materials cited below include guidance through 28 January 2025 and do not constitute a complete check of Indian GST law through 7 October 2026. Verify the current Acts, rules, notifications and circulars before signing or applying the terms.
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1. Map each supply before classifying it
Start with what the parties will actually do and receive. A single agreement may cover several supplies with different GST treatment. Review each fee, commission, reimbursement, pass-through amount, deliverable and service level separately, and record:
- What the supplier does, and whether the work is performed by the supplier, an agent or a subcontractor.
- Which legal entity and GST registration supplies the service, and which entity or establishment receives and uses it.
- What each payment relates to, including any separate deliverables or charges.
- Which party’s records establish the recipient’s location and other relevant transaction facts.
Labels such as “reimbursement,” “support,” “commission,” “penalty” or “interest” do not determine the GST result by themselves. Apply the relevant law to the substance and facts of each supply.
2. Determine taxability and who is liable to pay
Check the specific service and its treatment
For each mapped supply, check the applicable classification, rate and exemption notifications. Establish whether it is taxable, exempt or subject to a specific treatment. A broad “GST extra” clause cannot resolve a classification question.
Distinguish forward charge from reverse charge
Under the ordinary supplier-charge model, the supplier accounts for GST. Reverse charge applies only where the government has notified the relevant category; the parties cannot create or remove statutory reverse-charge liability by contract. The CBIC’s Sectoral FAQs for banking and financial services describe this category-based framework.
For services under reverse charge, the CBIC FAQ gives the general time-of-supply rule as the earlier of payment or the day after 60 days from the supplier’s invoice, subject to the governing law and facts. Confirm the applicable rule for the particular supply and align payment, required documentation and tax-payment dates accordingly.
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The contract can allocate the economic cost and assign practical cooperation duties, but those terms do not change which party is legally liable to pay GST. State separately who must pay tax, issue any required document, provide information and retain supporting records.
3. Establish place of supply and the relevant records
Record the parties’ locations, GSTINs, the establishment receiving the service and the recipient address or location appearing in the supplier’s ordinary records. The applicable place-of-supply provision depends on the service and transaction; do not assume one rule covers all banking or financial services.
Domestic banking and financial services
For banking and other financial services within section 12(12) of the IGST Act, the statutory reference is the recipient’s location on the supplier’s records. If the supplier has not recorded that location, the provision uses the supplier’s location as a fallback. The section should not be applied automatically to every advisory, intermediary, custodial, specialized or cross-border service.
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Custodial services to FPIs
CBIC Circular 220/14/2024-GST, dated 26 June 2024, addresses place of supply for custodial services supplied by Indian banks to foreign portfolio investors (FPIs). Apply that clarification only if the service and parties fall within its stated fact pattern; check the circular and the current law for the specific arrangement.
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4. Set workable invoicing and correction terms
The CBIC invoice rules provide a 45-day period after supply for a banking company or financial institution, including an NBFC, to issue an invoice or equivalent document for taxable services under the cited rule. Confirm that the supplier qualifies and that the rule applies to the transaction.
Set out when the supplier will invoice and what information the recipient must provide, including the correct GSTIN and location details. Include a process for correcting an incorrect GSTIN, place of supply, tax amount or service period, and for issuing or accepting credit or debit notes where legally permitted. Specify who will notify the other party of an error and what records each will retain.
5. Assess the bank or NBFC’s input-tax-credit position
Do not price a service on the assumption that all GST charged will be recoverable. The CBIC’s Input Tax Credit Rules describe a 50% option for qualifying banks and financial institutions, including NBFCs engaged in accepting deposits or extending loans or advances. The option has exclusions and specified credit components; it is not an unconditional recovery of 50% of every GST amount.
For the recipient institution, establish whether it falls within the covered class and activity, whether it has elected the option, and which credits are unavailable because of non-business use, blocked-credit rules or other restrictions. Those facts determine whether GST is a pass-through or a cost in the commercial arrangement.
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If the parties are related, one is a foreign affiliate, or the agreement involves distinct registrations, document the relationship, recipient, consideration, invoicing approach and credit position. Do not assume that an internal service or an arrangement without an obvious cash fee has no valuation consequences.
CBIC Circular 225/19/2024-GST, dated 11 July 2024, addresses taxability and valuation of corporate-guarantee services between related persons. It discusses the Rule 28 framework, including an amendment stated to operate retrospectively from 26 October 2023. Determine the valuation and tax result from the current rules, the circular and the actual arrangement; do not generalize the clarification beyond its scope.
7. Examine loan-related charges by their purpose and trigger
Review each charge by why it is imposed, what contractual event triggers it and which regulatory direction applies. Do not assume that every amount associated with lending—whether described as interest, a fee or a penalty—has the same GST treatment.
CBIC Circular 245/02/2025-GST, dated 28 January 2025, clarifies GST treatment of penal charges imposed by regulated entities such as banks and NBFCs following RBI instructions to discontinue penal interest for non-compliance with loan terms and use penal charges. The circular states that those instructions took effect on 1 January 2024. Its stated instruction scope excludes credit cards, external commercial borrowings, trade credits and structured obligations covered by product-specific directions. Check that the charge and product fall within the clarification before applying it.
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8. Make the contract operationally consistent with the tax analysis
Once each supply has been assessed, compare the agreement’s commercial terms with the resulting tax treatment. The review should resolve the following points for each relevant supply:
- Tax and charge mechanism: who accounts for GST, including whether a notified reverse-charge category applies.
- Place of supply: which statutory provision applies and which locations and supplier records support the result.
- Price and credit economics: whether the stated price includes or excludes tax, and how the recipient’s actual credit position affects the cost.
- Valuation: whether related-party or corporate-guarantee rules affect the taxable value.
- Compliance tasks: who issues documents, supplies registration and location information, pays tax, corrects errors and cooperates on records or audits.
- Changes: how the parties will notify one another and handle pricing or invoicing if law, registration details or the recipient’s credit position changes.
Use the CBIC Sectoral FAQs, Input Tax Credit Rules, the relevant circulars and section 12(12) of the IGST Act as starting points, then verify the current provisions and apply them to the agreement’s services, party locations, registrations, price mechanics and operating records.
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