The Directorate General of GST Intelligence (DGGI) is investigating several loan-recovery agencies over their classification as general service providers, a practice that allows them to claim input tax credit (ITC) on expenses and potentially offer services to banks at lower prices, sources told Moneycontrol.
At the heart of the dispute is a difference in how the two categories are taxed. Traditional recovery-agent services provided to banks and financial institutions fall under the reverse-charge mechanism (RCM), under which the recipient bank, rather than the recovery agency, discharges the 18 percent goods and service tax (GST).
The recovery agency, however, continues to incur GST on expenses such as technology, rent, manpower and other operating costs. With the output tax on recovery services being paid by the bank under RCM, the agency cannot ordinarily use these input tax credits against that service, effectively embedding some of those taxes in its costs.
Classifying the offering as a general service changes those economics. Under the normal forward-charge mechanism, the agency charges and pays GST and can claim eligible ITC on its business expenses, potentially allowing it to quote more competitively to banks while protecting margins.
“Several recovery agencies have received notices from DGGI seeking explanation on the classification along with information on what services they provided to clients. The arrangement, so far, has been beneficial to banks as well, hence the lenders are not raising any issues with the agent. If the recovery agents are unable to defend their classification as general service providers, it could open them up for a tax audit where the department will examine the cases more deeply,” one of the sources said.
For instance, if a lender has an overall budget of Rs 10 crore for recovery services under an RCM structure, Rs 1.8 crore may have to be accounted for towards GST, leaving Rs 8.2 crore for the underlying service. Under a forward-charge structure, the agency can structure its commercial quote differently, discharge GST itself and utilise eligible ITC on its expenses.
DGGI is examining whether agencies using this structure can legitimately classify themselves as general service providers rather than recovery agents, sources said.
The agencies argue that their businesses have evolved beyond conventional debt collection. Their offerings increasingly bundle recovery with automated email reminders, call-centre support, analytics, technology and back-office operations, prompting some to take the view that they should be treated as broader service providers for GST purposes.
The agencies argue that their businesses have evolved beyond conventional debt collection. Their offerings increasingly bundle recovery with automated email reminders, call-centre support, analytics, technology and back-office operations, prompting some to take the view that they should be treated as broader service providers for GST purposes.
“The ambiguity has also emerged as a clear litigation trigger. Tax authorities may seek to characterise the entire arrangement as recovery agent services, even where the recovery function is only incidental to a wider outsourcing or technology-enabled engagement,” he added.
