Understanding GST Implications on No-Cost EMI Schemes

No-Cost EMI plans offer a way to purchase goods by paying the full amount in monthly installments, seemingly without any additional charges. Many consumers are unaware of the Goods and Services Tax (GST) implications. This article simplifies how GST applies to No-Cost EMIs and reveals the true costs involved.

What is No-Cost EMI and How Does It Function?

A No-Cost EMI allows consumers to acquire an item immediately and distribute the total cost into manageable monthly payments, all while the product's price remains constant. Unlike traditional EMIs, no explicit interest is added.

For instance, if a phone costs Rs.24,000, you could pay Rs.4,000 monthly for six months, totaling Rs.24,000, with no apparent extra fees.

However, the mechanics behind this arrangement are more intricate. Typically, regular EMIs include an interest charge, increasing the overall payment. In a No-Cost EMI, this interest is not directly charged to the customer. Instead, the merchant or brand indirectly covers it.

This process works as follows:

• The seller provides a discount equivalent to the interest amount that would normally be applied.
• This discount is then utilized to offset the interest owed to the bank or financial institution.
• Consequently, the customer pays the product's original price in installments, giving the impression of zero interest.

This payment method offers convenience, particularly for significant purchases like electronics or home appliances. Nevertheless, it is crucial to recognize that it is not entirely devoid of charges, as GST may still apply.

Is Goods and Services Tax Applicable on No-Cost EMI?

Yes, GST is applicable to No-Cost EMI plans, though not in the manner many anticipate. While the term suggests the absence of additional costs, a closer examination of the payment structure reveals a different reality.

Under a no-cost EMI arrangement, the bank continues to levy interest on the transaction. The seller, however, offers a discount that precisely matches this interest, ensuring the total amount paid by the customer aligns with the product's price. The critical point is that even though the seller absorbs the interest, the interest component itself is not exempt from GST.

Current GST regulations mandate an 18% tax on the interest portion of the EMI. This means the bank charges GST on the interest, and this cost is ultimately borne by the customer, not waived or absorbed by the seller. This is particularly prevalent in credit card-based EMI plans, where interest is consistently treated as a taxable financial service.

Therefore, while the No-Cost EMI model mitigates the interest burden by adjusting the selling price, it does not eliminate the GST liability. This explains why customers occasionally observe a minor additional charge on their credit card statements, despite choosing a "No Cost" option.

Breakdown of GST Charges on No-Cost EMI

To illustrate, let's consider a practical example.

Illustrative Scenario:

• You purchase a smartphone valued at Rs.30,000.
• You opt for a 3-month no-cost EMI plan.
• You expect to pay Rs.10,000 per month with no additional expenses.

Here’s a detailed look at the underlying financial movements:

• The bank applies interest (amounting to Rs.734.66 in total over three months in this example).
• The seller grants a discount equivalent to this interest.
• However, the 18% GST levied on the interest (Rs.132.24) is not waived.
• You, the customer, are responsible for this GST, not the seller.

Monthly Cost Breakdown:

GST on Credit Card Interest for No-Cost EMI

When a no-cost EMI is availed via a credit card, the bank still applies interest. While the seller provides a discount to cover this interest, the GST on that interest remains.

The bank levies 18% GST on the interest component, and this charge is passed on to the customer. This GST is separate from the seller's discount and is not reflected in the product's advertised price. It is incorporated into your monthly EMI payments, incrementally increasing your overall expenditure.

This imposition occurs because GST regulations categorize credit card EMI interest as a taxable service, which is not eligible for tax exemption.

For a comprehensive understanding, refer to GST on credit card EMI.