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Open in new tab Taxability of Corporate Guarantees under GST
– Dayita Kanodia, Executive | finserv@vinodkothari.com
A person who can’t pay gets another person who can’t pay, to guarantee that he can pay.
– Charles Dickens
Background
It is a common practice for companies to issue guarantees for loans taken by their group companies. When transactions happen between related parties, there is always a likelihood of them being not at arm’s length.
Accordingly, this has led to questions that whether such corporate guarantees given without any consideration shall be liable to GST. A Supreme Court ruling issued earlier this year has clarified that corporate guarantees issued without any consideration shall not be liable to service tax.
Therefore while the situation in case of levy of service tax has been clarified by the ruling, the same has led to a lot of ambiguities and questions for the levy of GST on such guarantees. This article aims to clarify the same.
Read more →Responsible Lending Conduct – Release of Movable/Immovable Property Documents on Repayment/Settlement of Personal Loans
– Eliza Bahrainwala & Shreshtha Barman, finserv@vinodkothari.com
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Our resources related to the topic:
Investment valuation norms for banks: RBI aligns rules with global accounting standards
– Vinod Kothari | vinod@vinodkothari.com
Vide a 12th Sept notification, the RBI has brought in Master Directions for Classification, Valuation and Operation of Investment Portfolio of Commercial Banks. The new norms bring the accounting and valuation of investments by banks closer to global accounting standards.
While the apparent focus of these Directions would have been valuation of investment portfolios, however, the Directions may also impact investment policies and investment operations of banks as well.
Read more →UPIs become virtual credit cards: A game changer in credit delivery
– Vinod Kothari & Abhirup Ghosh | finserv@vinodkothari.com
The recent notification[1] by the RBI permitting banks to provide pre-sanctioned credit facilities to be used by Unified Payment Interface (UPI) is a game changer. The full dimensions of this new mode of extending credit will possibly take some time to develop or demonstrate, but clearly, as UPI itself changed the way the country handles payments, the linking of UPI with pre-sanctioned credit facilities is also a major change.
Currently, UPIs may pull money from the customer’s bank account (current or savings account), overdraft accounts, prepaid wallets or credit cards. Now, UPI may have a linked credit facility as well, and a customer may dip into that credit line while making any payment for which she currently uses UPI.
Read more →Chinese Non-banking financial entities in precarious state
Vinod Kothari, Director | finserv@vinodkothari.com
One of the trust companies defaults; other casualties likely
Chinese financial system is opaque and intriguing, for any outside trying to understand it. Regulatory framework is also mostly spasmodic, and given the fact that Chinese regulators do not follow global institutions or their regulations, Chinese institutions have developed along their own lines.
One of the non-banking financial entities in China is “trust companies”, somewhat similar to private collective investment vehicles or alternative investment funds seen elsewhere. These trust companies mostly invest in activities closely mimicking the lending of banks, while at the same time not being regulated as such. The size of the shadow banking industry in China, better known as “non banking financial intermediaries” (NBFIs) is huge, and is the second largest in the world, next only to the USA. Of the NBFIs, trust companies were estimated to be about USD 4 trillion, and 79% of the trust companies are based out of China, as per data as of end-December, 2021, appearing in the NBFI report of the Financial Stability Board.
Read more →Full Day Workshop on NBFCs: Recent Regulatory Changes
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Loan Penal Charges: Accounting and GST implications
Abhirup Ghosh, Qasim Saif & Aanchal Kaur Nagpal | finserv@vinodkothari.com
Background
Levying of penal charges or late payment charges are claimed as ‘just’, owing to the underlying breach of contract under the Contract Act, 1972. A breach or a non-performance by one party entitles the other party to receive compensation for any loss or damage suffered due to such breach. Penalties may not only be compensatory; they also have a deterrent element.
In order to ensure compliant behaviour, lenders charge penalties to their borrowers for various ‘events of default’; the predominant ones being penalty for delayed payments (in the form of charges or interest) and prepayment penalties. However, such charges stopped being ‘just’ and ‘reasonable’ when lenders started maneuvering such penalties as revenue enhancement tools, rather than as a deterrent measure and compensation for a breach. Such unreasonable penalties coupled with non-disclosures, compounding of penal interest, etc. were highly prejudicial to consumer interest and accordingly, caught the eye of the regulator.
The RBI introduced guidelines to the lenders to ensure reasonableness and transparency in the disclosure of penal interest vide its Circular on ‘Fair Lending Practice – Penal Charges in Loan Accounts’(RBI Guidelines on penal charges’) dated August 18, 2023. Our article and FAQs[1] on the same may be read here[2].Our YouTube video discussing the guidelines may be viewed here.
However, charging penal interest also raises several practical questions for lenders, mainly indirect taxation and accounting of penal charges, which will be discussed in detail in this article.
Read more →Consultancy and advisory services on Digital Personal Data Protection Act, 2023
Our resources on the topic:
- Digital Personal Data Protection Bill 2023: Analysing the Impact on Digital Lenders
- Watch our Shastrartha on Digital Personal Data Protection Bill, 2023 – Analysing the impact on financial sector lender
Click here to view our firm profile – https://vinodkothari.com/2021/09/vkcpl-team-profile/
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FAQs on Penal Charges in Loan Accounts
– Team Finserv | finserv@vinodkothari.com
Updated as on 4th March 2024
| The Circular is applicable from April 01, 2024. Please feel free to drop your queries in the comment box below and we will try our best to reply at the earliest. |
RBI on August 18, 2023 came up with the circular Fair Lending practice – Penal charges in Loan accounts (‘Circular’). The Circular restricts entities from charging penal interest on loan accounts, instead they should levy penalty or penal charges..
We have developed a set of FAQs on the press release and updated the same based on this Circular read along with the RBI Notification on Fair Lending Practice – Penal Charges in Loan Accounts: Extension of Timeline for Implementation of Instructions dated December 29, 2023 and FAQs released by RBI where we intend to answer some of the critical questions relating to the penal charges in loan accounts.
Our write-up on the topic can be read here – Penal charges not a cash-cow for lenders
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