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Factoring is one of the popular modes of working capital financing globally. In India, this mode of working capital financing has started getting traction, and like every other thing, factoring is also impacted by Goods and Services Tax (GST).
GST is levied on both sale of goods and services; hence, it’s important to determine whether the factoring is done for goods or services and whether the same is taxable or exempt. A factoring transaction has several components, and each component needs to be viewed separately from a GST perspective.
First, there’s a sale of receivables by the seller to a factoring company, for which the seller receives a lump sum consideration. This consideration from the factoring company is arrived at after discounting the receivables at a predetermined discounting rate.
Receivables are actionable claims, and as per the definition of ‘Goods’ under Section 2(52) of the CGST Act, 2017, actionable claims are covered. However, Schedule III of the CGST Act, 2017 states that actionable claims are neither supply of goods nor a supply of services. Therefore, it can be concluded that the sale of receivables isn’t taxable under GST law.
An actionable claim refers to any debt other than a debt secured by mortgage of immovable property or pledge or by hypothecation of movable property or a beneficial interest in any movable property not in the claimant’s possession. Only claims to a debt not secured by mortgage, pledge or hypothecation shall be considered actionable claims. Transactions related to unsecured debts are exempted from GST, so the transfer of receivables isn’t taxable.
The factoring company usually charge a nominal fee for processing the transaction. As per Section 2(102) of the CGST Act, 2017, services exclude any money-to-money transaction but include activities related to the use of money. This processing fee charged by the factoring company falls within the meaning of activities relating to the use of money. Hence, processing fees are taxable under GST as a supply of service. The HSN code for GST on the processing fee is 997158, and the GST rate is 18%.
The factoring company also charges a nominal amount for the factoring transaction for the registration with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI).
Services under GST is defined as anything other than the supply of goods, money and securities. The registration charges doesn’t come under any of the three aforesaid. Therefore, it qualifies to be a supply of services and is taxable under GST law.
These charges are usually computed periodically for offering advance payment to the seller for the receivables. These charges are similar to interest charged by banks on cash credit facilities. Notification No.12/2017-CGST dated 28.06.2017 offers an exemption to services by providing loans, advances or deposits in so far as such consideration is represented as interest or discount. Hence, it could be concluded that interest or discount charges recovered by a factoring company aren’t taxable under the GST law.
At times, the factoring arrangement could have one single charge for collecting and servicing receivables adjusted with the discounting rate. In such a scenario, the discounting rate will have two components. The first component is the compensation for the credit risk, and the other is related to servicing and collection.
While the first one is exempted from the purview of GST, the latter is taxable under GST as a mixed supply. In such a kind of mixed supply, GST is chargeable on the transaction at the supply rate, which is the highest. Therefore, the discount or finance charges recovered by the factoring company will be taxable to GST at the rate for the supply of collection services.