GST on Services: R&D, Vehicle Leasing and Banking Clarifications vide Circular No. 266/12/2026-GST

The Central Board of Indirect Taxes and Customs (CBIC), through its Tax Research Unit, has issued Circular No. 266/12/2026-GST dated 28 October 2026, clarifying the applicability of GST on certain services.

Issued following the recommendations of the 57th GST Council meeting held on 8 October 2026, the circular addresses research and development services, import of services by foreign shipping companies, motor vehicle leasing, the status of TRAI, Fund Transfer Pricing in banks, and services provided by NBFCs under co-lending arrangements.

The clarifications aim to ensure uniform interpretation of GST provisions. (Section 168(1) of the CGST Act, 2017)

1. GST Exemption on Research and Development Services: Self-Certification

Background of the R&D exemption

The circular explains that research and development services provided by eligible Government Entities, research associations, universities, colleges, or other institutions against consideration received in the form of grants have been exempt from GST since 10 October 2024. The specified research associations and institutions must meet the notification requirements referred to in the exemption. (Entry 44A of Notification No. 12/2017-Central Tax (Rate); clauses (ii) or (iii) of Section 35(1) of the Income-tax Act, 1961)

This exemption followed the recommendations of the 54th GST Council meeting held on 9 September 2024. The Council had also recommended examining how research and development services should be distinguished from consultancy services.

Why was a clarification required?

The terms “research,” “research and development,” “consulting,” and “consultancy” are not defined in the CGST Act, its rules, the notifications issued under it, or the explanatory notes to the scheme of classification of services.

Because these activities may involve similar scientific and technical work, there can be an overlap. Consultancy services may consequently be classified as R&D services, or R&D services may be classified as consultancy.

Certificate from the head of the institution

Where the exemption is claimed for eligible R&D services against grants, a certificate issued by the head of the concerned entity or institution may suffice for claiming the exemption.

The certificate should confirm that the activity undertaken is in the nature of research and development and is not consultancy. This clarification applies within the scope of the existing exemption and its eligibility requirements. (Paragraph 2.3 of the circular; Entry 44A of Notification No. 12/2017-Central Tax (Rate))

2. GST on Import of Services by Foreign Shipping Companies

The circular addresses services imported by an Indian establishment of a foreign shipping company from:

• A related person outside India; or

• Any of its establishments outside India.

The clarification concerns such services when supplied without consideration, meaning without payment.

Exemption from 1 November 2026

The circular records that these imports of services have been exempted with effect from 1 November 2026, following the recommendations of the 57th GST Council meeting. (Notification No. 07/2026-Integrated Tax (Rate), dated 27 October 2026)

Treatment for the earlier period

For the period from 1 July 2017 to 31 October 2026, payment of GST on these services has been regularized on an “as is where is” basis. (Paragraph 3.3 of the circular)

The two periods should therefore be read separately:

This treatment is specific to the identified imports of services made without consideration.

3. GST on Motor Vehicle Leasing: Registration, Insurance and Other Recoveries

Motor vehicle leasing arrangements may involve recovery of expenses in addition to the lease rent. The circular addresses the GST treatment of these amounts when recovered separately by the lessor, the person leasing out the vehicle, from the lessee, the person taking it on lease.

The expenses covered include:

• Registration charges, including road tax;

• Insurance premium;

• FASTag charges; and

• Other incidental expenses relating to the leased vehicle.

Why these expenses form part of the leasing service

In the arrangement described in the circular, the lessor purchases the vehicle in its own name and remains its legal owner during the lease period. The lessor undertakes registration, insurance, and other statutory compliances and recovers the related expenses from the lessee.

These expenses relate to the lessor’s own vehicle and are closely connected with the leasing service.

GST treatment of separately recovered expenses

The recovery of these statutory and ancillary expenses forms part of the value of the composite supply of the leasing service. The recovered amounts are taxable at the rate applicable to the motor vehicle leasing service. (Paragraph 4.4 of the circular)

Accordingly, separately recovering the identified expenses does not take them outside the value of the leasing service.

4. Is TRAI Treated as “Government” under GST?

The Telecom Regulatory Authority of India (TRAI) sought clarification on whether it falls within the meaning of “Government” under GST law.

The representation referred to TRAI’s status as a statutory authority established to perform regulatory functions and the fact that it is substantially funded through Government grants.

Statutory authority and Government are distinct

The circular explains that “Government” means the Central Government for the relevant definition under the CGST Act. (Section 2(53) of the CGST Act, 2017)

It also refers to CBIC’s Sectoral FAQs on Government Services, which distinguish statutory bodies, corporations, and authorities created by Parliament or a State Legislature from the Government. Regulatory bodies and other autonomous entities do not fall within that definition merely because of their statutory status.

The circular therefore clarifies that TRAI is not “Government” within the meaning of the relevant GST provision. (Paragraph 5.3 of the circular; Section 2(53) of the CGST Act, 2017)

5. GST on Fund Transfer Pricing in Banks

What is Fund Transfer Pricing?

Fund Transfer Pricing, or FTP, is an internal funds allocation and performance measurement mechanism used by banks.

Under this mechanism, funds are notionally transferred between branches through the Head Office. The mechanism helps evaluate the performance of different branches or business units.

The Head Office notionally pools funds from branches that mobilize deposits and allocates them to lending branches. An internally determined price is applied, linked to the relevant product or tenure.

Why did the GST issue arise?

The circular notes that demands had been raised in certain cases on the notional amount or interest recorded under FTP.

These demands treated FTP as a financial service provided by the Head Office to its branches, on the ground that the Head Office and branches are distinct persons. (Paragraph 6.2 of the circular; Section 25(4) of the CGST Act, 2017)

Notional interest covered by the exemption

The circular explains that the notional amount represents the cost of funds and is similar in nature to interest.

It clarifies that the notional amount or interest recorded in the books against the activity of making a loan or advance under the FTP mechanism is covered by the definition of “interest” for the purpose of the exemption. (Paragraph 6.4 of the circular; Notification No. 12/2017-Central Tax (Rate), dated 28 June 2017)

The clarification specifically concerns the notional amount or interest arising from the loan or advance activity under the FTP mechanism.

6. GST on NBFC Services to Banks under Co-Lending Arrangements

How the co-lending arrangement works

Under the co-lending model described in the circular, banks and Non-Banking Financial Companies (NBFCs) jointly extend credit to borrowers in a pre-agreed proportion.

The model combines the lower cost of funds of banks with the wider reach of NBFCs. The borrower is generally charged a blended interest rate based on the respective lending rates of the participating regulated entities.

Services provided by the NBFC

The circular identifies several activities undertaken by NBFCs for banks under these arrangements:

• Customer sourcing and KYC;

• Credit appraisal and underwriting;

• Servicing and monitoring;

• Collection of repayments; and

• Recovery.

The NBFC acts as the primary interface with the borrower. The circular also records that the participating regulated entities are to decide objective criteria for determining the fees or charges payable for such services, as stated in the RBI directions referred to in the circular.

Taxability and value of the services

The specified lending services provided by an NBFC to a bank under a co-lending arrangement are taxable under GST.

The value of these services is the value specified in the contractual agreement between the NBFC and the bank. (Paragraph 7.4 of the circular)

Conclusion

Circular No. 266/12/2026-GST clarifies the GST treatment of six service-related issues, including certification for eligible R&D exemptions, expenses recovered in vehicle leasing, notional interest under banks’ FTP mechanism, and NBFC services under co-lending arrangements. Each clarification should be read within its stated scope, conditions, and applicable period.

To read the complete clarification and access the original circular, refer to Circular No. 266/12/2026-GST dated 28 October 2026: 

https://taxinformation.cbic.gov.in/view-pdf/1003358/ENG/Circulars

Disclaimer : This article is for informational purposes only and should not be construed as legal or professional advice. Taxpayers should consult their tax advisor based on the facts of their specific case before taking any action.