The Central Board of Indirect Taxes and Customs (CBIC) has clarified that notional interest recorded by banks under their internal Fund Transfer Pricing (FTP) mechanism qualifies for the interest exemption under GST. However, services provided by non-banking financial companies (NBFCs) to banks under co-lending arrangements, including customer sourcing, credit appraisal and loan servicing, are taxable.
The clarifications have been issued through Circular No. 266/12/2026-GST dated October 28, 2026, following recommendations of the 57th GST Council meeting held on October 8, 2026.
Issued under Section 168(1) of the Central Goods and Services Tax Act, 2017, the circular addresses six issues concerning banking, motor vehicle leasing, research and development, foreign shipping companies and the status of the Telecom Regulatory Authority of India (TRAI).
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Banks’ Internal Fund Transfer Interest Covered By GST Exemption
CBIC examined the applicability of GST to notional interest recorded when funds are notionally transferred between different branches of a bank through its head office.
Fund Transfer Pricing is an internal funds allocation and performance measurement mechanism. Under this system, the head office notionally pools funds from branches mobilising deposits and allocates them to lending branches at an internally determined price linked to the relevant product or tenure.
The circular notes that demands had been raised in certain cases on the ground that FTP represented a financial service provided by the head office to its branches, which are treated as distinct persons under Section 25(4) of the CGST Act.
CBIC has clarified that the notional amount represents the cost of funds and is akin to interest. The definition of interest under Notification No. 12/2017-Central Tax (Rate) covers interest payable in any manner in respect of money borrowed or debt incurred.
Consequently, the notional amount or interest recorded against the activity of making a loan or advance under the FTP mechanism falls within the definition of interest for the exemption under that notification.
The clarification specifically concerns these FTP amounts and does not declare every transaction between a bank’s head office and branches exempt.
NBFC Services To Banks Under Co-Lending Arrangements Taxable
The circular separately clarifies the tax treatment of services provided by NBFCs to banks under co-lending arrangements.
Under this model, banks and NBFCs jointly extend credit to borrowers in a pre-agreed proportion. The arrangement combines banks’ lower cost of funds with NBFCs’ wider reach. Borrowers are generally charged a blended interest rate based on the participating entities’ respective lending rates.
CBIC refers to the RBI (Commercial Banks–Transfer and Distribution of Credit Risk) Directions, 2025, which recognise services provided by NBFCs to banks in these arrangements.
Such services primarily include customer sourcing, know-your-customer verification, credit appraisal, underwriting, servicing, monitoring, collection of repayments and recovery.
The circular explains that NBFCs generally act as the primary interface with borrowers and are therefore positioned to perform these activities. The participating regulated entities are required to determine objective criteria for the fees or charges payable for such services.
CBIC has clarified that these services are taxable under GST, with their value determined by the contractual agreement between the NBFC and the bank.
The clarification concerns the services supplied to the bank under the co-lending arrangement. It does not state that the borrower’s entire blended interest payment becomes taxable.
Road Tax, Insurance And FASTag Recoveries Included In Vehicle Leasing Value
CBIC has clarified that statutory and ancillary expenses recovered by a vehicle lessor in addition to lease rent form part of the value of the composite leasing supply.
The expenses covered include registration charges, road tax, insurance premiums, FASTag charges and other incidental expenses relating to the leased vehicle.
In the leasing arrangement examined, the lessor purchases the vehicle in its own name and remains its legal owner during the lease period. It undertakes registration, insurance and other statutory compliances and recovers the expenses from the lessee.
According to the Board, these expenses relate to a vehicle owned by the lessor and are incidental to, and closely connected with, the leasing service.
Their recovery therefore forms part of the value of the composite supply and attracts the GST rate applicable to the motor vehicle leasing service.
Recovering these amounts separately from lease rent does not take them outside the value of the composite supply described in the circular. The clarification does not prescribe a single numerical GST rate for every motor vehicle lease.
Institution Head’s Certificate May Suffice For R&D Exemption
The circular provides an evidentiary clarification for institutions claiming the research and development exemption under Entry 44A of Notification No. 12/2017-Central Tax (Rate).
CBIC recalls that the exemption, effective from October 10, 2024, covers qualifying R&D services supplied against consideration received as grants by the government entities and eligible research associations, universities, colleges or other institutions described in the entry.
The Board observed that “research”, “research and development”, “consulting” and “consultancy” are not defined in the CGST Act, the relevant rules or notifications, or the explanatory notes to the classification of services.
Given the scientific and technical nature of such activities, there may be overlap between R&D and consultancy, creating the possibility of incorrect classification.
Where the Entry 44A exemption is claimed, a certificate issued by the head of the concerned eligible entity or institution, confirming that the activity is R&D rather than consultancy, may suffice for claiming the exemption.
This clarification operates within the existing exemption. It does not exempt every consultancy assignment undertaken by a research institution or remove the conditions concerning institutional eligibility and grant-based consideration.
Past GST Treatment Of Specified Shipping-Service Imports Regularised
The circular records that imports of services by an Indian establishment of a foreign shipping company from a related person or any of its establishments outside India, when made without consideration, have been exempted from November 1, 2026.
It identifies Notification No. 07/2026-Integrated Tax (Rate), dated October 27, 2026, as the notification giving effect to this exemption.
For the earlier period, CBIC has regularised payment of GST on these specified transactions from July 1, 2017, to October 31, 2026, on an “as is where is” basis.
The prospective exemption and the treatment of the earlier period are addressed separately. The circular does not announce a general refund entitlement for tax already paid.
The relief is confined to the specified imports without consideration by Indian establishments of foreign shipping companies. It does not extend to every import of services or every shipping transaction.
TRAI Is Not ‘Government’ Under CGST Act
CBIC has clarified that TRAI does not fall within the meaning of “Government” under Section 2(53) of the CGST Act.
TRAI had sought clarification because it is a statutory authority established under the Telecom Regulatory Authority of India Act, 1997, performs statutory regulatory functions and is substantially funded through government grants.
The Board explained that Section 2(53) defines Government to mean the Central Government. It also referred to its sectoral FAQs, which distinguish statutory bodies, corporations and authorities created by legislation from the Government itself.
Accordingly, TRAI’s statutory origin and government funding do not bring it within that definition.
The clarification determines TRAI’s status for this purpose; it does not declare every supply made by TRAI taxable irrespective of other applicable provisions.
Directions To Field Formations
CBIC has directed that field formations be instructed in accordance with the circular and that difficulties in implementation be brought to the Board’s notice.
The circular provides a common basis for examining the identified transactions, particularly the distinction between exempt interest and taxable services in banking arrangements, the valuation of vehicle leasing supplies and the documentation supporting eligible R&D exemption claims.
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