Why Banks levy GST on No Cost EMI?

[Dhruvkumar]

Recently @TechnoFino posted article about Cost behind No Cost EMI. I'm adding this as extension where I'll try to explain why banks levy GST on No Cost EMI but not in other EMIs and actully who is getting that money(Technically government but read below to know more)


Suppose the price of the product is ₹100 (excluding GST), and the GST is 10%. So the price for the customer is ₹110. Now, if the shopkeeper is selling the product for ₹90, the GST will be 10% of ₹90, which is ₹9. Therefore, the price for the customer is ₹99.

In the above example, you can see that the shopkeeper reduced the price by ₹10, but for the customer, it changed by ₹11 where ₹1 came from reduced tax liability.

Now, when you purchase something on a No Cost EMI, you receive a discount equal to the interest deducted from the price. So the invoice for the product is of a lower price.

Let's revisit the previous example, where the product is priced at ₹110 (including GST). If the interest is ₹10, the invoice is made for ₹100, with ₹90.90 as the price and ₹9.10 as the GST. Here, the shopkeeper only has to pay ₹9.10 out of pocket for the interest payment, not ₹10.

However, assuming the customer does not foreclose or cancel the EMI, the price at which the customer gets the product is ₹110, not ₹100. So the GST of ₹10 needs to be paid, but only ₹9.10 is paid. Therefore, banks have to levy GST on the interest, which would be ₹0.90 in total. So banks do levy GST on No Cost EMI but not on other EMIs.

This money is actually going to the shopkeeper who promised you a 10% discount but only provided 9.10% in our example. So next time, don't blame the government but blame yourself for not thinking this through.

In the case of foreclosure or cancellation, the actual price of the product in the customer's hand decreases, and so does the GST.

This hidden trick, where shops and banks are able to sneak some money out of your pocket while putting the blame on the government, is legal but, in my opinion, immoral. Someone should file a legal case on this practice of 'No Cost EMI'.

In this trick, the extra money you'll pay depends on two things: the GST rate on the product and the EMI interest rate provided by the bank. However, in most cases, you don't know the EMI interest rate offered by the bank.

Example:

1. ₹110 product (including GST)
   • GST: 18%
   • Bank rate: 16% annual
   • Duration: 6 months
   • Loan amount: ₹105, and ₹5 would be interest. So you would pay 18% GST on ₹5, which is ₹0.90.
2. ₹110 product (including GST)
   • GST: 18%
   • Bank rate: 22% annual
   • Duration: 6 months
   • Loan amount: ₹103, and ₹7 would be interest. So you would pay 18% GST on ₹7, which is ₹1.26.

So, with this simple trick, for the same product, you have to pay ₹0.36 more, and most people won't even know at what rate the bank is providing the loan.


@TechnoFino Can we create some presurre here by fighting legally.

 

[NikAsr1503]

Gst on the interest component is specifically disallowed from exemption in gst Act, hence levied.
No clear explanation given by the ministry on this.
Personal belief is that they want to discourage use of EMI on credit card.

 

[saver-user]

That's the problem with the public. We don't question the actions much. And In foreign they are questioning over some word someone said 🥲. All South Asian countries have this situation. I would say most countries actually. Why bank is allowed to levy GST ? Guess we all should take action I am not sure who will take action on this RBI complaint right?

 

[saver-user]

Recently @TechnoFino posted article about Cost behind No Cost EMI. I'm adding this as extension where I'll try to explain why banks levy GST on No Cost EMI but not in other EMIs and actully who is getting that money(Technically government but read below to know more)


Suppose the price of the product is ₹100 (excluding GST), and the GST is 10%. So the price for the customer is ₹110. Now, if the shopkeeper is selling the product for ₹90, the GST will be 10% of ₹90, which is ₹9. Therefore, the price for the customer is ₹99.

In the above example, you can see that the shopkeeper reduced the price by ₹10, but for the customer, it changed by ₹11 where ₹1 came from reduced tax liability.

Now, when you purchase something on a No Cost EMI, you receive a discount equal to the interest deducted from the price. So the invoice for the product is of a lower price.

Let's revisit the previous example, where the product is priced at ₹110 (including GST). If the interest is ₹10, the invoice is made for ₹100, with ₹90.90 as the price and ₹9.10 as the GST. Here, the shopkeeper only has to pay ₹9.10 out of pocket for the interest payment, not ₹10.

However, assuming the customer does not foreclose or cancel the EMI, the price at which the customer gets the product is ₹110, not ₹100. So the GST of ₹10 needs to be paid, but only ₹9.10 is paid. Therefore, banks have to levy GST on the interest, which would be ₹0.90 in total. So banks do levy GST on No Cost EMI but not on other EMIs.

This money is actually going to the shopkeeper who promised you a 10% discount but only provided 9.10% in our example. So next time, don't blame the government but blame yourself for not thinking this through.

In the case of foreclosure or cancellation, the actual price of the product in the customer's hand decreases, and so does the GST.

This hidden trick, where shops and banks are able to sneak some money out of your pocket while putting the blame on the government, is legal but, in my opinion, immoral. Someone should file a legal case on this practice of 'No Cost EMI'.

In this trick, the extra money you'll pay depends on two things: the GST rate on the product and the EMI interest rate provided by the bank. However, in most cases, you don't know the EMI interest rate offered by the bank.

Example:

1. ₹110 product (including GST)
   • GST: 18%
   • Bank rate: 16% annual
   • Duration: 6 months
   • Loan amount: ₹105, and ₹5 would be interest. So you would pay 18% GST on ₹5, which is ₹0.90.
2. ₹110 product (including GST)
   • GST: 18%
   • Bank rate: 22% annual
   • Duration: 6 months
   • Loan amount: ₹103, and ₹7 would be interest. So you would pay 18% GST on ₹7, which is ₹1.26.

So, with this simple trick, for the same product, you have to pay ₹0.36 more, and most people won't even know at what rate the bank is providing the loan.


@TechnoFino Can we create some presurre here by fighting legally.

I learnt it the hard I can personally confirm this. I bought a bike years ago on no cost emi. But ended up paying 2k extra on the name of GST 🙂

 

[Dhruvkumar]

Gst on the interest component is specifically disallowed from exemption in gst Act, hence levied.
No clear explanation given by the mistry on this.
Personal belief is that they want to discourage use of EMI on credit card.

If they don't put GST here merchant can put full on discount on his purchase price and can skip paying GST altogether.

Like assuming he is getting product ₹100. His selling price is ₹150 so his effective GST paid by merchant is ₹50*GST%

Now merchant can arrange this thing about give it no cost EMI with ₹50 interest deduction so invoice will be off ₹100 so no effective GST to be paid by merchant. Now bank can pass on some commision to merchant and no GST in whole transection. So it'll create a loophole.

I'll rewrite article but it's more about why government has to levy GST on interest and how it'll result in small profit from merchant and small extra payment from customer without realising.

 

[Dhruvkumar]

That's the problem with the public. We don't question the actions much. And In foreign they are questioning over some word someone said 🥲. All South Asian countries have this situation. I would say most countries actually. Why bank is allowed to levy GST ? Guess we all should take action I am not sure who will take action on this RBI complaint right?

I'll rewrite the article but if government doesn't put GST on NCEMI it'll create an GST loophole. It's not GST on EMI is problem it's that it's actually reducing GST liability for merchant.

 

[VISHESH_BANSAL]

it's that it's actually reducing GST liability for merchant.

is Merchant getting any additional benifit by reduction in GST Liability?

If yes then Explain with a numerical.

Banks also deposit GST collected to the Government.
Banks also share GSTIN, in Credit Card Statements.

 

[RaviAgl]

Recently @TechnoFino posted article about Cost behind No Cost EMI. I'm adding this as extension where I'll try to explain why banks levy GST on No Cost EMI but not in other EMIs and actully who is getting that money(Technically government but read below to know more)


Suppose the price of the product is ₹100 (excluding GST), and the GST is 10%. So the price for the customer is ₹110. Now, if the shopkeeper is selling the product for ₹90, the GST will be 10% of ₹90, which is ₹9. Therefore, the price for the customer is ₹99.

In the above example, you can see that the shopkeeper reduced the price by ₹10, but for the customer, it changed by ₹11 where ₹1 came from reduced tax liability.

Now, when you purchase something on a No Cost EMI, you receive a discount equal to the interest deducted from the price. So the invoice for the product is of a lower price.

Let's revisit the previous example, where the product is priced at ₹110 (including GST). If the interest is ₹10, the invoice is made for ₹100, with ₹90.90 as the price and ₹9.10 as the GST. Here, the shopkeeper only has to pay ₹9.10 out of pocket for the interest payment, not ₹10.

However, assuming the customer does not foreclose or cancel the EMI, the price at which the customer gets the product is ₹110, not ₹100. So the GST of ₹10 needs to be paid, but only ₹9.10 is paid. Therefore, banks have to levy GST on the interest, which would be ₹0.90 in total. So banks do levy GST on No Cost EMI but not on other EMIs.

This money is actually going to the shopkeeper who promised you a 10% discount but only provided 9.10% in our example. So next time, don't blame the government but blame yourself for not thinking this through.

In the case of foreclosure or cancellation, the actual price of the product in the customer's hand decreases, and so does the GST.

This hidden trick, where shops and banks are able to sneak some money out of your pocket while putting the blame on the government, is legal but, in my opinion, immoral. Someone should file a legal case on this practice of 'No Cost EMI'.

In this trick, the extra money you'll pay depends on two things: the GST rate on the product and the EMI interest rate provided by the bank. However, in most cases, you don't know the EMI interest rate offered by the bank.

Example:

1. ₹110 product (including GST)
   • GST: 18%
   • Bank rate: 16% annual
   • Duration: 6 months
   • Loan amount: ₹105, and ₹5 would be interest. So you would pay 18% GST on ₹5, which is ₹0.90.
2. ₹110 product (including GST)
   • GST: 18%
   • Bank rate: 22% annual
   • Duration: 6 months
   • Loan amount: ₹103, and ₹7 would be interest. So you would pay 18% GST on ₹7, which is ₹1.26.

So, with this simple trick, for the same product, you have to pay ₹0.36 more, and most people won't even know at what rate the bank is providing the loan.


@TechnoFino Can we create some presurre here by fighting legally.

@Dhruvkumar

I do not agree with this.

I myself manage invoicing and issue full amount of invoice (with cashback) to the customer. I purchase goods from my manufacturer and make full payment to them. So, in case of cashback schemes, whatever benefit the manufacturer wants to give to the customer, it needs to be reimbursed to me as I already made full payment to the manufacturer.

Suppose product is-
Rs 100 sale value
Rs 15 discount or cashback
Rs 85 net cost to customer

I issue invoice to customer of Full amount of Rs 100 and not Rs 85 as I get back Rs 15 from my manufacturer in my bank. So, it is not possible or even ethical to raise an invoice of net amount of Rs 85 as per above. In case, I issue an invoice of lesser amount, how will I show the proceeds of cashback received in my account against that transaction.

Regarding GST on interest, it is net income in the hands of the banks. So, they have to charge GST as already defined by law.

Overall, whatever business income, it will be subjected to Gst if you are in its scope (registered under Gst act).

I don't want to be harsh but I think you have been misled and the above opening post of yours is in complete disagreement with what the law states.

Feel free to correct me if I am wrong.

Thanks!!