I saw a charge on my statement related to a NACH mandate that included GST. Is it legal for banks to charge GST on these fees?
While banks in India generally do not charge any fee for the initial NACH registration, they do charge a penalty for a NACH failure or ‘return’. It is perfectly legal and mandatory for banks to charge GST on this penalty amount, as these charges are considered a taxable service.
Clarifying the ‘Registration Fee’ Misconception
My friend saw a NACH-related charge with GST on his statement and mistakenly believed he was charged for his new SIP registration. I had to first clarify that banks offer NACH mandate registration as a free service to encourage automated payments. They do not charge a fee just to set up a new auto-debit instruction.
Where GST is Actually Applied: On Penalty Charges
I asked my friend to look at his bank statement again, and he saw that the transaction description read ‘NACH Return Charges’. This meant the charge was a penalty because a scheduled payment had failed due to insufficient funds. A banker friend of mine confirmed that as per government tax laws, banks are required to collect GST (currently at 18%) on all such penal charges for service failures.
The Legal Basis for GST on Penalties
My banker friend explained the reasoning behind this rule. He said that penalties for transaction failures, late payments, or non-compliance are considered by the tax authorities to be a ‘supply of service’ (in this case, the service of tolerating the default or the administrative work involved). Therefore, these charges fall under the purview of GST, and banks are legally obligated to collect this tax on behalf of the government. This is why a ₹500 penalty often results in a total debit of ₹590.
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