Case Study: Bajaj Finance’s ₹341 Crore GST Notice — What Went Wrong and How a Strategic Tax Approach Can Make All the Difference

Overview

In May 2024, Bajaj Finance Ltd., one of India’s top NBFCs, received a Show Cause Notice (SCN) from the Directorate General of GST Intelligence (DGGI) for alleged GST evasion of ₹341 crore. The notice points toward non-payment of GST on various fees charged to customers, specifically:

• Penal Interest
  
  

• Bounce Charges
  
  

• Processing Fees
  
  

• Documentation Charges
  
  

While Bajaj Finance has denied any wrongdoing and stated it will respond appropriately, this development raises critical questions about GST interpretations, documentation protocols, and proactive compliance — especially for financial services companies.

What Triggered the Notice?

According to the notice (based on preliminary findings):

• Penal charges and ancillary fees were being collected as part of loan agreements.
  
  

• These were classified by Bajaj as exempt from GST or outside the purview of taxable supply.
  
  

• The DGGI contends that these charges constitute a consideration for a supply of services and are liable to GST under the reverse charge mechanism or otherwise.
  
  

This notice isn’t isolated — it's part of a larger GST audit trend targeting banks, fintechs, and NBFCs. Several entities are being questioned over fee-based revenues, especially when they're not directly tied to interest income.

Our Interpretation: Where the Red Flags Were Missed

As a firm that handles complex GST cases, here's our breakdown of the likely gaps that led to the SCN:

1. Misclassification of Charges

• Penal interest and bounce charges are increasingly being treated by tax authorities as ‘services’, not as part of interest income (which is exempt).
  
  

• Failing to report or misclassifying these in GSTR-1 and 3B increases risk.
  
  

2. Inconsistent Contract Language

• Loan agreements and invoices must clearly define and differentiate taxable vs non-taxable charges.
  
  

• Ambiguity here may have strengthened the department’s stand.
  
  

3. Documentation Gaps

• Lack of supporting tax positions, circular references, or legal notes may have hurt the defense position in early scrutiny.
  
  

4. Over-Reliance on Internal Interpretations

• Without external validation or advisory support, companies often misread provisions like:
  
  

• Section 7(1) – Scope of Supply
  
  

• Section 15 – Valuation of Supply
  
  

• Schedule III exclusions (where certain financial transactions are not treated as supply)
  
  

How We’d Have Approached It

While we aren’t involved with the Bajaj case, our firm has handled several high-value GST matters. Here’s how we would have managed the risk — and can help other NBFCs stay safe:

✅ GST Health Check on Revenue Streams

We run quarterly internal audits (not system-generated, but by human-led review) to verify if:

• Fee-based income aligns with latest CBIC circulars and DGGI notices
  
  

• All incidental/penal charges are tagged with proper HSN/SAC and reflect in GSTR-1 disclosures
  
  

• Revenue classification is legally robust — not just technically defensible
  
  

✅ Legal Interpretation Mapping

We document all tax positions — whether exempt, taxable, or disputed — with:

• References to latest advance rulings, CBIC notifications, FAQs
  
  

• Section-wise mapping to CGST Act, 2017
  
  

• Clear ‘intent’ logs in internal policy files
  
  

This is vital if a show cause notice ever arrives — a thought-through position is a better defense than a rushed reply.

✅ Contract and SOP Vetting

We work with clients’ legal and finance teams to:

• Rework loan agreements and customer contracts
  
  

• Ensure clarity on tax components in charges
  
  

• Embed fallback clauses if future GST rates or rulings change
  
  

✅ Human-Led Filing and Review

All filings are prepared and reviewed by professionals — not auto-submitted by generic software.
We use advanced enterprise software, but our approach is people-led and cross-reviewed, which reduces risk drastically in high-scrutiny sectors like BFSI.

Final Word: Bajaj Finance Is a Wake-Up Call

Even the most sophisticated companies can falter if proactive GST strategy isn’t built into the compliance process. With over ₹1,200 crore of similar investigations expected in FY 2024–25 (source: DGGI reports), the need for legally grounded, human-led GST management has never been greater.

Need a Pro Team to Handle Your GST Compliance?

Whether you're a lender, fintech, or service provider dealing with multi-revenue streams, we offer:

• Deep-dive GST audits
  
  

• Department reply drafting & hearing support
  
  

• Contract vetting for GST impact
  
  

• Real-time advisory on grey areas like penal interest, mixed supplies, or RCM