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No GST on penal charges: The government has clarified that no bank, NBFC, regulated entities (REs) can charge Goods and Services Tax (GST) on penal charges on loans. Penal charges are payments in the nature of liquidated damages for breach of contract and hence are not a consideration for tolerating an act or situation.
The government has stated that no Goods and Services Tax (GST) is required to be paid on penal charges on loans levied by RBI regulated entities like banks, NBFCs etc. The Central Board of Indirect Taxes and Customs (CBIC) in its notification dated 28 January 2025 has clarified that penal charges are something which is levied by banks, NBFCs, etc to bring a sense of discipline among customers. The technical term for this type of charge is ‘liquidated damages’. For those unfamiliar with this term, liquidated damages means a preset amount of money that is paid by the defaulting party in the event of breach of any contract with another party.
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