CBIC Issued Clarification on Applicability of GST on Various Services Such as Penal Charges, Services by Payment Aggregator etc.

In line with recommendations provided by the 55th GST Council meeting, CBIC has issued the following detailed clarification on the applicability of GST on certain services vide Circular No. 245/02/2025-GST dated 28th January 2025:

1. Applicability of GST on Penal Charges levied by the Regulatory Authority, such as Banks and NBFC

Issue:

• RBI has issued instructions to Regulated Entities (REs), i.e., Banks and NBFC, to not charge penal interest for non-compliance with loan terms. However, REs are now to levy penal charges for non-compliance with effect from 1st January 2024. 
• The amendment is made with the intent to inculcate a sense of credit discipline. However, these instructions do not apply to credit cards, external commercial borrowings, trade credits, etc which have their product-specific directions.
• Accordingly, the CBIC has received representation to clarify the applicability of GST on such penal charges.

Clarification:

• Some of the field formations are taking a stand that such penal charges are like consideration for tolerating an act or situation.
• Similar issues were examined in Circular No. 178/10/2022-GST dated 03.08.2022, wherein it has already been clarified that certain payments such as liquidated damages for breach of contract are not a consideration for tolerating an act or situation. They are rather amounts recovered to deter such acts; such amounts are for preventing breach of contract or non-performance and are thus mere ‘events’ in a contract. 
• The Essence of the contract is ‘performance’ and not ‘breach’.
• Penal charges levied by REs are essentially like breach of terms of contract and hence, fall within the ambit of the above clarification.
• Therefore, no GST is payable on the penal charges levied by Regulated Entities.

2. Whether exemption under SI 34 of N/No. 12/2017-CGST Rate applies to the payment Aggregator?

Issue:

• CBIC has received representations seeking clarity on the applicability of GST exemption under Sl. No. 34 of notification No. 12/2017-CTR dated 28.06.2017 to Payment Aggregators (PAs) about the settlement of an amount INR 2000.

Clarification:

CBIC has clarified that:

• SI No. 34 of N/No. 12/2017-CT(Rate) provides GST exemption on Services provided by an acquiring bank, to any person concerning the settlement of an amount up to INR 2000 in a single transaction transacted through credit card, debit card, charge card or other payment card service.
• “Acquiring Bank” means any banking company, financial institution including non-banking financial companies, or any other person, who makes the payment to any person who accepts such a card.
• Payment Aggregators (PAs) facilitate e-commerce sites and merchants to accept various payment instruments from their customers without any requirement to create a separate payment integration system of their own. 
• Therefore, PAs receive payments from customers, pool, and transfer them to the merchants within a specified period.
• As per RBI Guidelines, PAs receive payments from customers in an escrow account and are obligated to do the final settlement with the merchant within periods specified by RBI. Therefore, the RBI-regulated PAs are covered by the definition of acquiring bank, i.e. “any other person, who makes the payment to any person who accepts such a card”.
• Accordingly, RBI-regulated PAs fall within the definition of acquiring a bank for the exemption.
• Further, as per RBI Guidelines, Payment Aggregators and Payment Gateways (PGs) are different keeping in view their role vis-à-vis handling funds. 
• PAs receive payments from customers, pool, and transfer them to the merchants within a specified time. Whereas, PGs provide technology infrastructure to route and facilitate the processing of an online payment transaction without any involvement in the handling of funds.
• Therefore, CBIC has clarified that GST exemption under Sl. No. 34 is available to RBI-regulated Payment Aggregators (PAs) for settlement of an amount up to INR 2000 in a single transaction. Further, the exemption is limited to the payment settlement function only, which involves the handling of money and does not cover Payment Gateway (PG) services.

3. GST on research and Development services provided by Government entities against Government Grant

Issue:

• 54th GST Council meeting recommended exempting research and development services provided by Government Entities or research associations, universities, colleges, or other institutions (notified under Section 35(1)(ii) or (iii) of the Income Tax Act, 196) against consideration in the form of grants. 
• Such exemption was provided w.e.f. 10th October 2024 vide notification No. 08/2024-CT(Rate) dated 8.10.2024.
• Accordingly, issues concerning the taxability of grants received against R & D services provided by Government Entities stand resolved w.e.f. 10th October, 2024.
• For the past period, i.e., 1st July 2017 to 9th October 2024, the 55th GST Council meeting recommended to regularize payment of GST on an ‘an as is where is’ basis.

Clarification:

• Accordingly, in line with the recommendation of the 55th GST Council meeting, CBIC has clarified that payment of GST on the supply of R & D Services by Government Entities against grants is regularized for the period 01.07.2017 to 09.10.2024, on ‘as is where is’.

4. GST on skilling services provided by Training Partners approved by the National Skill Development Corporation.

Issue:

• As recommended by the 54th GST Council meeting, the Sl. No. 69 of the Notification No. 12/2017-CTR was amended vide Notification No. 08/2024 dated 08.10.2024, to synchronize it with the new regulatory framework for skill development under NCVET.
• Therefore, the exemption earlier available to the skilling services provided by Training Partners approved by National Skill Development Corporation (NSDC) was withdrawn.
• The amended exemption was restricted to the skilling services provided by Training Bodies accredited with an Awarding Body that is recognized by the NCVET. 
• However, it was informed that NSDC is the implementing agency for skilling schemes of the Government of India as well as other skill development programs. Therefore, the withdrawal of the tax exemption to Training Partners approved by NSDC would adversely impact the skilling ecosystem significantly.
• Therefore, the 55th GST Council meeting recommended restoring the earlier exemption, Accordingly, such exemption has been reinstated by amending vide Notification No. 06/2025-CT(Rate) with effect from 16.01.2025.
• Further, the GST Council recommended regularizing payment of GST on services provided by Training Partners approved by NSDC for the period 10.10.2024 to 15.01.2025 on an ‘as is where is’ basis.

Clarification:

• Accordingly, CBIC has clarified that the payment of GST on services provided by Training Partners approved by the NSDC for the period of 10.10.2024 to 15.01.2025 is regularized on an ‘as is where is’ basis.
• Accordingly, the following is the applicability of GST on services provided by Training Partners approved by the NSDC:

5. Conclusion:

The Non-applicability of GST on penal charges and payment aggregators are entitled to GST exemption is a positive clarification as it demonstrates the Government’s commitment to foster a predictable tax environment for businesses. These clarifications will bring more tax certainty and help the GST officials take a uniform approach.