Taxing Credit Card Service Interest and Loan Interest - Banks Seek GST Council Clarification

Not very often does a justice starts a judgement with "the case is very interesting" and thereafter praising the writ petitioner. In the case of RAMESH KUMAR PATODIA Vs CITY BANK N.A. AND ORS. [2023-VIL-480-CAL] the same has occurred and therefore the case and the impact of the judgement must be understood. The question of law under GST is not very simple "Is the interest on loan availed by a credit card holder same as interest as a credit card service". We discuss the issue in brief in this article.

In Sl. No. 28 of the notification No. 9/2017- Integrated Tax (Rate), against heading 9971, except tax levied on interest in credit card services, the services specified in Column-III were exempt from the said tax. Now this interest is different from interest on loan.

Interest in credit card services is charged apropos a transaction wherein the issuer of the card advances a loan to the card holder to pay off the debt incurred by use of the credit card. The interest in case of such deferred payment by the holder of the card is a kind of service rendered can be called card services. Only on this kind of service could IGST be charged, levied and paid. However. merely because a holder of the bank's card is eligible and provided a loan, it does not convert the interest paid on such loan to the interest paid on deferred payment of credit card bill by a person.

To constitute credit card service, the service should be between the issuer of the card and the holder of the card and that the service should have some relationship or nexus with the holding, operation or use of such card including transactions made with it. The same card holder may be an ordinary savings account holder with the bank. The service rendered by the bank in relation to such ordinary account holding does not have any relationship with the service rendered by the bank to the same customer as a card holder in transactions concerning the card. If the loan is advanced to a card holder through use of the card, then a nexus exists and the service can be treated as a 'credit card service'. However, if the loan is not generated by charging the appellant's card, then no such nexus can be said have existed.

Thus, credit card holders who have a separate bank account with the same bank and get an independent loan are absolved from payment of GST @18% on the interest portion. Furthermore, many times banks charge a fee or additional interest for delayed payment of interest too. Again, in these cases, the same concept may apply – in case the original interest has a nexus with the credit card service, the additional interest would also be liable to GST. However, in case the original interest is exempt from GST, then subsequent interest would partake the nature of the original interest too.

This judgement has wide implications on the masses and as well as the Banks and we are sure that it would act as a precedent in numerous cases going forward, until and unless it is challenged. Further it is very much expected that the banks may going forward run to the GST Council to seek clarity on this aspect, wherein they would have a big exposure. Interestingly, while the GST Council is a stakeholder in this case, yet it is not a party to the case.