CBIC
Issues Clarifications on GST Applicability for R&D, Motor Vehicle Leasing,
Banking, NBFC and Other Services
CBIC has issued Instruction No. 02/2026 dated 30
October 2026, clarifying GST applicability on various services based on
recommendations of the 57th GST Council meeting. Key clarifications include:
1. R&D
vs Consultancy Services: A certificate
from the head of the eligible government entity, research institution,
university or college confirming that the activity is research and development
and not consultancy may suffice to claim GST exemption under Entry 44A of
Notification No. 12/2017-Central Tax (Rate).
2. Foreign
Shipping Companies: GST payment
on import of services without consideration by an Indian establishment of a
foreign shipping company from related overseas entities has been regularised on
an 'as is where is' basis for the period 1 July 2017 to 31 October 2026.
Exemption applies from 1 November 2026.
3. Motor
Vehicle Leasing: Recovery of
registration charges, road tax, insurance premiums, FASTag
charges and other incidental expenses by the lessor from the lessee will form
part of the composite supply of leasing services and attract the applicable GST
rate.
4. TRAI
Status: Telecom
Regulatory Authority of India (TRAI) is not treated as 'Government' under GST
law, as it is a separate statutory regulatory authority.
5. Fund
Transfer Pricing in Banks: Notional
interest recorded under the Fund Transfer Pricing mechanism for internal fund
transfers between bank branches is covered by the definition of 'interest' and
is exempt from GST under Notification No. 12/2017-Central Tax (Rate).
6. NBFC
Co-Lending Services:
Lending-related services provided by NBFCs to banks under co-lending
arrangements, including customer sourcing, KYC, credit appraisal, loan
servicing and recovery, are taxable under GST. Taxable value will be the amount
specified in the agreement between the NBFC and the bank.
[CBIC Instruction No. 02/2026 dated
30 October 2026]
Subject: Clarifications regarding applicability of GST on certain
services.
Based on the
recommendations of the GST Council in its 57th meeting held on 8th
October 2026, and in exercise of the powers conferred under section 168(1) of
the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the
CGST Act), the following clarifications are being issued to ensure unifo1mity
in interpretation:
2. Clarification regarding
the distinction between research & development and consultancy services
based on a self-certification mechanism.
2.2. The matter has been
examined. The terms 'research', 'research
and development (R&D) ', 'consulting'
or 'consultancy' are not defined
under the CGST Act, 2017, rules or notifications issued thereunder. The said
terms are also not defined in the explanatory notes to the scheme of classification
of services under GST. It is observed that owing to the scientific and
technical nature of such activities, there may be an overlap between research
and development (R&D) services and consultancy services and accordingly,
there may be a possibility that consultancy services are wrongly classified as
R&D services or vice versa.
2.3. Accordingly, where
an exemption is claimed under Entry 44A of Notification No. 12/2017- Central
Tax (Rate) in respect of research and development services undertaken against
consideration received in the form of grants, a certificate issued by the head
of the concerned government entity, research association, university, college
or other institution notified under clauses (ii) or (iii) of sub-section (1) of
section 35 of the Income-tax Act, 1961, ce1iifying that the activity undertaken
is in the nature of research & development and not in the nature of
consultancy, may suffice for the purpose of claiming the said exemption.
The GST Council in its 57th meeting has recommended to exempt
import of services by an Indian establishment of a foreign shipping company·from a related
person or any of its establishment outside India, when made without
consideration. Accordingly, this has been given effect from 01.11.2026 vide
Notification No. 07/2026-Integrated Tax (Rate) dated 27.10.2026.
3.1 The Council further
recommended to regularize the payment of GST on import of services by an Indian
establishment of a foreign shipping company from a related person or any of its
establishment outside India, when made without consideration, for the past
period on 'as is where is' basis.
3.2 Therefore, on
recommendations of the GST Council, the payment of GST on import of services by
an Indian establishment of a foreign shipping company from a related person or
any of its establishment outside India, when made without consideration, is
hereby regularized for the period from 01.07.2017 to 31.10.2026 on 'as is where is'
basis.
4.1. Representations have
been received seeking clarification regarding the GST treatment of statutory
and ancillary expenses recovered separately in addition to the lease rent by the lessor from the lessee in
connection with leasing of motor vehicles. These expenses include
registration charges (including road tax), insurance premium, FASTag charges and other incidental expenses relating to
the leased vehicle. In a motor vehicle leasing arrangement, the lessor purchases the
vehicle in its own name and remains its legal owner during the lease period.
The lessor lmdertakes registration, insurance and
other statutory compliances relating to the vehicle and recovers such expenses
from the lessee.
4.2. The matter has been
examined. The above-mentioned expenses are incmTed by
the lessor for the vehicle owned by it and are incidental to the service of
leasing the vehicle to the lessee, such expenses are closely connected to the
leasing service.
4.3. It is hereby
clarified that recovery of such statutory and ancillary expenses form part of
the value of the composite supply of the leasing service and shall be taxed at
the rate applicable to the leasing service of motor vehicle.
5.1. Representation has
been received from Telecom Regulatory Authority of India (TRAI) seeking
clarification whether TRAI is covered within the meaning of
"Government" under GST law on the grounds that TRAI is a statutory
authority established under the Telecom Regulatory Authority of India Act, 1997
to perform ce1iain statutory regulatory functions and is substantially funded
through Government grants.
5.2. The matter has been
examined. "Government" has been defined under section 2(53) of the
CGST Act to mean the Central Government. It has also been clarified at Point
No. 6 of CBIC's Sectoral FAQs on Government Services that a statutory body,
corporation or authority created by the Parliament or a State Legislature is a
juridical entity distinct from the Government and cannot be regarded as
Government. The FAQs fu1iher clarify that regulatory bodies and other
autonomous entities do not fall within the definition of
"Government".
5.3. Thus, it is hereby
clarified that TRAI, a statutory regulatory authority, is not
"Government" within the meaning of section 2(53) of the CGST Act.
6.1. Representation has
been received seeking clarification regarding applicability of GST on the
notional interest recorded in the Books of Accounts by the banks under the Fund
Transfer Pricing (FTP) mechanism, wherein funds are notionally transferred
between different branches of a bank through its Head Office. FTP is an internal funds
allocation and performance measurement mechanism used by banks for evaluating
the performance of different branches or business units.
6.2. It has been
observed that in certain cases, demands have been raised on such notional
amount/interest on the ground that FTP represents a financial service provided
by the Head Office to its branches since the Head Office and its branches are
distinct persons under section 25(4) of the CGST Act.
6.3. The matter has been
examined. Under the FTP mechanism, the Head Office notionally pools funds from
deposit-mobilising branches and allocates such funds
to lending branches at an internally determined price linked to the relevant
product or tenure. Such notional amount represents the cost of funds and is
akin to interest. Further, the definition of "interest" in
Notification No. 12/2017-Central Tax (Rate) covers interest payable in any
manner in respect of moneys borrowed or debt incurred.
6.4. Therefore, on
recommendations of the 57th meeting of GST Council, it is hereby
clarified that the notional amount/interest recorded in the Books of Accounts
against the activity of making a loan or an advance under the Fund Transfer
Pricing mechanism is covered by the definition of "interest" for the
purpose of exemption under Notification No. 12/2017-Central Tax (Rate) dated
28.06.2017.
7.1. Representations have
been received seeking clarification regarding the taxability of services
provided by Non-Banking Financial Companies (NBFCs) to banks under co-lending
arrangements.
7.2. The issue is examined
and it is noticed that RBI has issued directions, viz., RBI (Commercial Banks -
Transfer and Distribution of Credit Risk) Directions, 2025 (The Directions)
which recognizes services provided by NBFCs to bank in co-lending arrangements.
Under the co lending model, banks and NBFCs jointly
extend credit to borrowers in a pre-agreed proportion, with the
objective of combining the lower cost of funds of banks with the wider reach of
NBFCs. The borrower is generally charged a blended rate of interest based on
the respective lending rates of the participating regulated entities. As per
the Directions, NBFC provides 'lending services' to bank in a co-lending arrangement.
7.3. These services
primarily involve undertaking activities such as customer sourcing, KYC, credit
appraisal, underwriting, servicing, monitoring, collection of repayments and
recovery. Since NBFC acts as primary interface with the borrower hence NBFCs
are in the best position to provide such services. The Reserve Bank of India,
in the Directions, also stated that the regulated entities in such co-lending
arrangements shall decide the objective criteria for determining the fees or
charges payable for such services.
7.4. Therefore, on
recommendations of the 57th meeting of GST Council, it is hereby
clarified that lending services, as mentioned above, provided by an NBFC to a
bank under a co-lending arrangement are taxable under GST and the value of such
services shall be the value specified in the contractual agreement entered into
between the NBFC and the bank.
2. Field formations
under your charge may be instructed accordingly.
File No.: CBIC-20001/3/2026-GST