CBIC Clarifies GST Exemptions for R&D, Shipping, Bank Interest & Taxability of NBFC Services

Summary: CBIC Circular No. 266/12/2026-GST, dated 28 October 2026, addresses six important issues relating to the GST treatment of services following recommendations made at the 57th GST Council meeting. The clarifications concern research and development services, foreign shipping companies, motor vehicle leasing, the legal status of TRAI, notional interest under banks’ Fund Transfer Pricing arrangements and services provided by NBFCs under co-lending agreements. For research institutions, a certificate from the head of the institution may establish that the activity constitutes research and development rather than consultancy, subject to the other exemption conditions. Imports of specified services without consideration by Indian establishments of foreign shipping companies receive prospective exemption from 1 November 2026, with earlier periods regularised on an “as is where is” basis. In motor vehicle leasing, recoveries towards road tax, insurance and FASTag form part of the taxable value of the composite leasing service. The circular further clarifies that TRAI is not “Government” within the meaning of Section 2(53) of the CGST Act. Notional interest recorded under banks’ internal Fund Transfer Pricing arrangements is covered by the applicable interest exemption. Conversely, services supplied by NBFCs to banks under co-lending arrangements attract GST on the contractual service consideration, although interest charged to borrowers remains exempt. These clarifications have practical implications for invoicing, exemption documentation, pending assessments, litigation and GST compliance.

GST Circular 266/12/2026 on Services Explained in Simple Words

What this circular is about

Circular No. 266/12/2026 GST was issued by the CBIC on 28 October 2026, along with Circular 265 on goods. This one deals with services. It answers six separate questions, all on the recommendation of the GST Council in its 57th meeting held on 8 October 2026.

Some of these points touch big institutions like banks, NBFCs, shipping lines and TRAI. Others, like the motor vehicle leasing point, touch ordinary businesses that take cars on lease for their staff. I have tried to explain each one in a way that a person with no tax background can follow.

1. Research or consultancy? A certificate from the head of the institution is enough

From 10 October 2024, research and development services are exempt from GST under Entry 44A of Notification No. 12/2017 Central Tax (Rate), if three things are present:

1. the service is provided by a Government entity, a research association, a university, a college or another institution;

2. that body is notified under clause (ii) or (iii) of Section 35(1) of the Income Tax Act, 1961; and

3. the payment is received in the form of a grant.

The trouble is that GST law nowhere defines “research”, “research and development”, “consulting” or “consultancy”. Scientific and technical work often looks like both. A university testing a new material for a company may call it research, while an officer may call it consultancy and demand tax.

The Board has taken a practical line. When the exemption is claimed, a certificate from the head of the concerned institution, stating that the activity is in the nature of research and development and not consultancy, may suffice for claiming the exemption.

So universities, colleges and research bodies should get such a certificate signed by the head of the institution for each grant funded project and keep it on record. The other two conditions, notification under Section 35 and payment by way of grant, must still be satisfied.

2. Foreign shipping companies: free services from the parent are now exempt

A foreign shipping line usually has an office or establishment in India. The head office abroad, or a sister concern, often gives this Indian office services like IT support, management, or documentation, without charging anything.

Under GST, a supply between related persons is a supply even without consideration. So the department took the view that the Indian office was importing services from its parent and had to pay IGST under reverse charge on them, even though not a single rupee was paid.

The GST Council in its 57th meeting recommended two things, and both have now been done:

1. For the future: such import of services by the Indian establishment of a foreign shipping company, from a related person or from any of its establishments outside India, when made without consideration, is exempt from 01.11.2026. This has been done by Notification No. 07/2026 Integrated Tax (Rate) dated 27.10.2026.

2. For the past: for the period from 01.07.2017 to 31.10.2026, the matter is regularised on an “as is where is” basis.

“As is where is” means the past is left exactly as it stands. Tax already paid stays paid and no refund is given. Where no tax was paid, it will not be demanded now. Shipping companies who have pending notices on this issue should bring this circular to the notice of the officer.

3. Car leasing: road tax, insurance and FASTag recovered from the lessee are part of the lease value

Many companies today take cars on lease for their officers instead of buying them. The leasing company buys the car in its own name and remains the owner throughout the lease. It pays the registration charges and road tax, takes the insurance, gets the FASTag, and then recovers all these amounts from the lessee over and above the monthly lease rent.

The doubt was whether GST is payable only on the lease rent, or also on these recoveries. Some leasing companies treated them as pure reimbursements outside GST.

The Board’s answer is clear. These expenses are incurred by the lessor for a vehicle that it owns, and they are incidental to the leasing service. So they are closely connected to the leasing service and form part of the value of one composite supply. GST is payable on them at the same rate as the leasing service of the motor vehicle.

In plain terms: if the monthly rent is one amount and the road tax, insurance and FASTag charges are billed separately, GST applies on the total, at the leasing rate. Lessees who are registered can take ITC of this tax, subject to the usual conditions and the blocked credit rules for motor vehicles under Section 17(5).

4. TRAI is not “Government” under GST

The Telecom Regulatory Authority of India asked the Board to treat it as “Government” under GST. Its argument was that it is a statutory authority set up under the TRAI Act, 1997, it performs regulatory functions, and it is mostly funded by Government grants.

The Board did not accept this. Section 2(53) of the CGST Act defines “Government” to mean the Central Government. Point No. 6 of the CBIC Sectoral FAQs on Government Services already says that a statutory body, corporation or authority created by Parliament or a State Legislature is a separate legal entity and cannot be regarded as Government. The same FAQs say that regulatory bodies and other autonomous bodies do not fall within “Government”.

So TRAI, being a statutory regulatory authority, is not “Government” under Section 2(53). The practical result is that the exemptions and reverse charge entries written specifically for services by or to “Government” cannot be applied to TRAI on that footing. The same reasoning will apply to other regulators that are created by a statute.

5. Banks: no GST on notional interest between branches under Fund Transfer Pricing

Think of a bank with many branches. A branch in a village collects a lot of deposits but gives few loans. A branch in a city gives many loans but has fewer deposits. The head office moves money on paper from the first branch to the second, and fixes an internal price for it, so that it can judge which branch is really earning. This internal system is called Fund Transfer Pricing, or FTP. No money goes to any outsider. It is only an entry in the bank’s own books.

In some cases officers raised GST demands on this notional interest. Their reasoning was that the head office and branches with separate GST registrations are distinct persons under Section 25(4), and so the head office was supplying a financial service to the branch.

The Board has now clarified that this notional amount represents the cost of funds and is akin to interest. Notification No. 12/2017 Central Tax (Rate) defines “interest” to cover interest payable in any manner in respect of moneys borrowed or debt incurred. So the notional amount or interest recorded in the books against the activity of making a loan or advance under FTP is covered by the definition of interest, and the exemption under Notification No. 12/2017 Central Tax (Rate) dated 28.06.2017 applies.

Banks with pending show cause notices or orders on FTP can now rely on this clarification.

6. NBFCs in co lending: their services to the bank are taxable

Under co lending, a bank and an NBFC together give one loan to a borrower in a fixed ratio. The bank brings cheaper money. The NBFC brings its reach into small towns and villages. The borrower pays a blended rate of interest.

The RBI Directions of 2025 on Transfer and Distribution of Credit Risk by commercial banks recognise that in such an arrangement the NBFC provides “lending services” to the bank. Since the NBFC is the one dealing with the borrower face to face, it does the following work for the bank too:

1. finding the customer and doing KYC

2. credit appraisal and underwriting

3. servicing and monitoring the loan

4. collecting repayments and recovery

The RBI has also said that the bank and the NBFC will decide the basis on which the fees for such services are fixed.

The Board has clarified that these lending services provided by an NBFC to a bank under a co lending arrangement are taxable under GST. The value for GST is the value written in the contract between the NBFC and the bank.

One point should not be confused. The interest the borrower pays on the loan continues to be exempt as before. What is taxed here is the service fee that the bank pays to the NBFC for the work listed above.

Who should act on this circular

Universities and research institutions should start keeping the head of institution certificate for every grant funded project. Shipping companies and banks with pending disputes on these points now have a Board circular in their favour. Car leasing companies, on the other hand, should correct their invoices and charge GST on the road tax, insurance and FASTag recoveries as part of the lease. NBFCs in co lending tie ups should check that they are charging GST on their service fee to the bank.

A circular cannot override the Act. But on each of these points, an officer in the field is now expected to follow the Board’s view, and that by itself should cut down a lot of avoidable litigation.