The government has assured non-banking financial companies (NBFCS) that it will examine the concerns around levy of goods and services tax (GST) on their co-lending arrangements with banks.

A clarification could be issued after the issue is looked into, officials said. At a meeting with finance ministry officials last week, banks and NBFCs raised the issue of GST authorities serving notices, saying it would lead to distortion and raise the cost of lending for the companies.

They said they have received queries and, in a few cases, notices, to determine whether GST has been evaded in the co-lending model, with the tax authorities claiming it is a service provided by one co-lender to another, attracting 18% tax. The industry maintains that co-lending is not a service and therefore is not liable to tax. The meeting, chaired by the Department of Financial Services secretary Vivek Joshi, was attended by representatives of banks and NBFCs and representatives from the Finance Industry Development Council (FIDC) and Microfinance Institutions Network (MFIN).

The FIDC had earlier sought clarity from the government on the issue. “Banks and NBFCs raised their concerns regarding GST on the co-lending arrangement as many have received communication in this regard from the Directorate General of GST Intelligence,” a senior executive, who attended the meeting, said on condition of anonymity, adding that the officials assured that they would look into the matter. Under a co-lending arrangement, usually two or more lenders come together to extend loans. The model has gained popularity as banks have access to new customers while NBFCs get cheaper funds and also a share in the loan book. According to a latest report by rating agency CRISIL, the co-lending book of NBFCs is expected to reach ₹1 lakh crore by June 2024, amid growing interest from partner banks.