GST applicability on certain services clarified

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The Circular clarifies GST implications on various sector-specific issues pursuant to recommendations of the 57th GST Council meeting as following:

Key clarifications:

1. Valuation of Motor Vehicle Leasing Services

The Circular clarifies that statutory and ancillary expenses recovered by a lessor from the lessee, such as registration charges, road tax, insurance premium, FASTag charges, are incidental to leasing services, and forms part of the value of the composite supply of motor vehicle leasing services. Thus, it is taxable at the same rate as applicable to the leasing service.

LKS comment: This will significantly impact the cost of doing business for NBFCs and leasing companies, who were hitherto treating such reimbursement of expenses as being not taxable. The validity of circular needs examination in light of concept of pure agent and reimbursement.

2. GST treatment of Fund Transfer Pricing (FTP) mechanism in banks

It has been clarified that notional amounts/ interest recorded in the books of a bank against the loan or an advance under the FTP mechanism is an ‘interest’ exempt from GST under Notification No. 12/2017-Central Tax (Rate) dated 28 June 2017.
Under the FTP mechanism, banks internally within its branches allocate the funds the head office has mobilised by deposit-generating branches for performance measurement and cost attribution purposes. The said notional interest / amount recorded is akin to interest.

LKS comment: The Circular is expected to curb litigation on inter-branch transactions within the banking sector by treating FTP adjustments as interest rather than consideration for services between distinct persons.

3. NBFC-Bank Co-lending Arrangements

It has been clarified that GST shall be payable on the lending services provided by the NBFCs to a bank in co-lending arrangements. The value of such services shall be the value prescribed under the contract entered into between the NBFC and the bank.
As per RBI (Commercial Banks- Transfer and Distribution of Credit Risk) Directions, 2025, NBFC provides services such as customer sourcing, KYC, credit appraisal, underwriting, servicing, monitoring, collection of repayments and recovery activities.

LKS comment: While the overall transaction with customer is that of providing loan for interest, inter-se settlements between the NBFC and bank is proposed to be taxed. Considering the overall nature of transaction is interest bearing loan, transaction may be reviewed in light of the clarification.

4. Import of services by an Indian establishment of a foreign shipping company

Import of services, without consideration, by an Indian establishment of a foreign shipping company from its related foreign establishment has been exempted prospectively from 1 November 2026 vide Notification No. 07/2026-Integrated Tax (Rate) dated 27 October 2026.
For the period prior to such exemption, GST liability is regularized on an 'as is where is' basis.

LKS comment: Regularization of past GST exposure for foreign shipping establishments brings certainty and mitigates legacy disputes in respect of cross-border intra-group service arrangements. This is similar to clarification provided earlier in the case of foreign airlines.

5. Whether TRAI is ‘Government’ under GST?

The Circular clarifies the definition/ ambit/ understanding of the expression “Government”. It is clarified that Section 2(53) of the CGST Act defines “Government” to mean the Central Government.
It is clarified that the Telecom Regulatory Authority of India (TRAI), being a statutory regulatory authority established under the TRAI Act, 1997, is a juridical entity distinct from the Central Government. In this regard, Circular relied on the CBIC’s Sectoral FAQs on Government Services.

LKS comment: By clarifying that TRAI is not “Government”, the Circular is providing interpretational guidance for determining GST treatment of services provided by similarly placed autonomous regulatory bodies. These services will not be taxable under RCM. The same should also apply to regulatory bodies such as SEBI, IRDAI, RBI, some of which have been clarified through FAQs earlier.

6. Distinction between R&D and Consultancy Services

Sl. 44 of the Notification No. 12/2017-Central Tax (Rate) dated 28 June 2027 exempts R&D services supplied by government entities or research associations, universities, colleges or other institutions, notified under clauses (ii) or (iii) of Section 35(1) of the Income Tax Act, 1961.
The Circular clarifies that the head of the concerned institution as mentioned above can a self-certify that the activity is in the nature of R&D and not consultancy and claim GST exemption.

LKS comment: The Circular reiterates the difference between the nature of R&D and consultancy. The Circular adopts a pragmatic approach to solve the classification issues in relation to claiming exemption in line with trust-based administration by prescribing a self-certification mechanism for distinguishing exempt R&D activities from taxable consultancy services, thereby reducing classification disputes.