No GST on Penal Charges levied by Banks and NBFCs

The applicability of GST on penal charges levied by Regulated Entities (REs) has been a topic of discussion following RBI instructions from August 18, 2023. Recently, in a GST Council meeting on December 21, 2024, several recommendations were made, including a crucial clarification regarding the non-applicability of GST on penal charges imposed by banks and NBFCs for borrowers' non-compliance with loan terms. This significant clarification was further reinforced through Circular No. 245/02/2025-GST issued by the Tax Research Unit of CBIC on January 28, 2025. The circular not only addressed the issue of GST on penal charges but also provided clarification on other related matters. Specifically, it highlighted that no GST will be imposed on penal charges, aligning with the directives set forth by the RBI. This update brings clarity to the taxation aspect of penal charges imposed by financial institutions, providing a clear understanding of the GST implications in such scenarios.