GST on Services (2026) Part 3: Motor Vehicle Leasing Recoveries, TRAI and Bank FTP / NBFC Co-lending
CA Meet Dhrangadhariya 
October 29, 2026
CA Meet Dhrangadhariya October 29, 2026
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Last updated: 29 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP
Quick summary
Circular No. 266/12/2026-GST, dated 28 October 2026, implements several more service-taxability clarifications from the GST Council’s 57th meeting of 8 October 2026. Two of its five items – research and development versus consultancy services, and the foreign shipping line import-of-services exemption – are already covered in our earlier posts in this “GST on Services” series, so this post covers the three that are genuinely new: vehicle leasing recoveries, TRAI’s status, and bank/NBFC lending arrangements.
New to terms such as “composite supply” or “distinct person”? See the technical terms explained in simple words further down.
Lessors of motor vehicles routinely recover, on top of the lease rent itself, a set of statutory and incidental expenses – registration charges (including road tax), insurance premium, FASTag charges, and similar costs relating to the leased vehicle.
The circular examines the structure of such a lease: the lessor purchases and owns the vehicle, undertakes registration, insurance and other statutory compliances, and recovers these costs from the lessee. Since these expenses are incurred for the vehicle owned by the lessor and are closely connected to, and incidental to, the leasing service itself, the circular clarifies:
Recovery of such statutory and ancillary expenses forms part of the value of the composite supply of the leasing service, and is taxed at the rate applicable to the leasing service of the motor vehicle.
In practice, this means a lessor cannot treat insurance recovery or FASTag recovery as a separate, independently-rated charge – it is bundled into the leasing supply’s own value and rate.
TRAI itself had sought clarification on whether it qualifies as “Government” under GST, on the basis that it is a statutory authority established under the Telecom Regulatory Authority of India Act, 1997, performs statutory regulatory functions, and is substantially funded through government grants.
The circular answers this firmly in the negative:
This clarification has broader relevance for any statutory regulator asking the same question about its own GST position.
Banks use a Fund Transfer Pricing (FTP) mechanism internally – the Head Office notionally pools funds from deposit-mobilising branches and allocates them to lending branches at an internally determined price, used to evaluate branch and business-unit performance. Because the Head Office and its branches are distinct persons under section 25(4) of the CGST Act, demands had been raised treating this notional amount as consideration for a financial service between distinct persons.
The circular rejects that approach:
Under RBI (Commercial Banks – Transfer and Distribution of Credit Risk) Directions, 2025, banks and NBFCs jointly extend credit to borrowers in a pre-agreed proportion under a co-lending model, combining the bank’s lower cost of funds with the NBFC’s wider reach. The borrower pays a blended interest rate, and the NBFC – acting as the primary customer interface – typically undertakes customer sourcing, KYC, credit appraisal, underwriting, servicing, and collection/recovery on the bank’s behalf.
The circular clarifies that these lending services provided by an NBFC to a bank in a co-lending arrangement are taxable under GST, and the value of such services is the value specified in the contractual agreement between the NBFC and the bank – not some notional or deemed value.
Whether it is pricing a vehicle-leasing contract correctly, confirming a statutory body’s GST status, or structuring GST treatment for an FTP arrangement or a co-lending agreement, these clarifications change real invoicing and compliance decisions – please reach out to our team and we will be happy to assist.
| Term | What it means |
|---|---|
| Composite supply | Two or more supplies naturally bundled together in the ordinary course of business, taxed as one supply at the rate of its principal (main) component. |
| Distinct person | Two registrations of the same legal entity – such as a bank’s Head Office and its branches – that GST law treats as separate persons for tax purposes. |
| Fund Transfer Pricing (FTP) | An internal mechanism banks use to price and record the notional cost of funds moved between branches through the Head Office, for performance measurement. |
| Co-lending | An arrangement where a bank and an NBFC jointly extend a loan to one borrower in an agreed proportion, combining the bank’s funds with the NBFC’s reach. |
No. Circular No. 266/12/2026-GST clarifies that statutory and ancillary expenses a lessor recovers on top of lease rent – registration charges including road tax, insurance premium, FASTag charges and similar incidental expenses – are closely connected to the leasing service and form part of the value of the composite supply of leasing. They are taxed at the rate applicable to the leasing service, not separately.
No. Even though TRAI is a statutory authority performing regulatory functions and is substantially funded through government grants, the circular clarifies it is not “Government” within the meaning of section 2(53) of the CGST Act. A statutory body, corporation or authority created by Parliament or a State Legislature is a distinct juridical entity from the Government itself.
No. The circular clarifies that the notional amount or interest a bank’s Head Office records when it pools funds from deposit-mobilising branches and allocates them to lending branches is covered by the definition of “interest” under Notification No. 12/2017-Central Tax (Rate), and is therefore exempt – even though the Head Office and its branches are distinct persons under section 25(4) of the CGST Act.
Yes. Where an NBFC undertakes customer sourcing, KYC, credit appraisal, underwriting, servicing, and collection or recovery on behalf of a bank in a co-lending arrangement recognised under RBI’s 2025 Directions, these lending services are taxable under GST, valued at the amount specified in the NBFC-bank contractual agreement.
Yes, but that topic and the related research-and-development self-certification clarification from the same circular are covered in our earlier posts in this series rather than repeated here, since both were already addressed there in full.
This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.
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