Sale of receivables is GST-exempt, but processing fees are taxable. Mixed finance charges generally attract tax at the highest applicable rate.
Factoring lets a business sell its receivables to a factor for immediate finance. Under GST, the receivable itself is an actionable claim that is generally outside the scope of GST, while the factor’s service charges attract GST. This guide explains the treatment.
Factoring represents a widely used method for working capital financing across the globe. In India, this financing approach is gaining popularity and, like other financial activities, is subject to the Goods and Services Tax (GST) framework.
The GST system applies to both the sale of goods and services, making it crucial to ascertain whether factoring activities qualify as goods or services and if they are taxable or exempt. A typical factoring transaction comprises several distinct elements, each requiring individual assessment from a GST standpoint.
Sale of Receivables
When a seller transfers receivables to a factoring company, they receive a lump sum payment. This amount is determined after applying a pre-established discounting rate to the receivables.
Receivables are legally recognized as actionable claims. According to Section 2(52) of the CGST Act, 2017, actionable claims are included within the definition of ‘Goods’. However, Schedule III of the CGST Act, 2017, explicitly states that actionable claims are considered neither a supply of goods nor a supply of services. Consequently, the sale of receivables is not taxable under Indian GST law.
An actionable claim refers to any debt that is not secured by a mortgage on immovable property, a pledge, hypothecation of movable property, or a beneficial interest in movable property not currently held by the claimant. Only claims for unsecured debts are classified as actionable claims. Since transactions involving unsecured debts are exempt from GST, the transfer of receivables remains non-taxable.
Processing Fees
Factoring companies typically impose a modest fee for processing transactions. While Section 2(102) of the CGST Act, 2017, excludes money-to-money transactions from the definition of ‘services’, it includes activities related to the use of money. This processing fee falls under the category of activities associated with the use of money, thus making it taxable under GST as a supply of service. The HSN code for GST on processing fees is 997158, with an applicable GST rate of 18%.
CERSAI Registration or Factoring Charges
Factoring companies also levy a small charge for registering the factoring transaction with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI).
Under GST, services are defined as anything other than the supply of goods, money, and securities. As these registration charges do not fall into any of these three excluded categories, they are considered a supply of services and are therefore taxable under GST law.
Discount or Finance Charges for Receivable Servicing
These charges are generally calculated periodically as compensation for providing advance payments to the seller against receivables. They are comparable to the interest that banks charge on cash credit facilities. Notification No. 12/2017-CGST dated 28.06.2017 provides an exemption for services that involve offering loans, advances, or deposits, provided the consideration for such services is represented as interest or discount. Based on this, it can be concluded that interest or discount charges recovered by a factoring company are not taxable under GST law.
Occasionally, a factoring arrangement might combine a single charge for collecting and servicing receivables, adjusted within the discounting rate. In such cases, the discounting rate will consist of two parts: one compensating for credit risk and the other covering servicing and collection activities.
While the component related to credit risk is exempt from GST, the latter, pertaining to servicing and collection, is taxable as a mixed supply. For a mixed supply, GST is applied to the entire transaction at the highest rate applicable to any of its individual supplies. Therefore, any discount or finance charges collected by the factoring company in such a scenario will be subject to GST at the rate designated for collection services.
Frequently Asked Questions
Is GST applicable on factoring of receivables?
The assignment of receivables (an actionable claim) is generally outside GST, but the factor’s service fee is taxable.
What is an actionable claim under GST?
A claim to a debt or beneficial interest; most actionable claims (other than specified ones) are neither goods nor services.
Does the factor charge GST?
Yes, on its service or processing charges for providing the factoring service.
Can the business claim ITC on factoring charges?
Yes, on the GST charged on the factor’s service fee, if used for business, subject to conditions.
