Bajaj Finance has come under investigation for allegedly evading ₹341 crore in taxes by misclassifying service charges as interest, potentially leading to a massive penalty of ₹850 crore.

According to a report by the Economic Times, the Directorate General of Goods and Services Tax Intelligence (DGGI) issued a show-cause notice to the company on August 3, accusing it of wrongly categorizing service charges as interest to benefit from tax exemptions.

The 160-page notice claims that Bajaj Finance has been evading GST by treating processing fees as interest, which is exempt under central tax rules.

Despite requests for comment, Bajaj Finance has not responded, and Livemint has been unable to independently verify the report.

The financial services company now faces significant penalties, including a 100 percent penalty for the alleged ₹341 crore tax evasion, ₹150 crore in interest, and ₹16 crore in daily interest until the payment is settled.

The alleged tax evasion occurred between June 2022 and March 2024.

The crux of the issue lies in the company’s practice of charging 'upfront interest' to customers who take out loans to purchase items from stores.

The DGGI argues that this 'upfront interest' is actually a taxable processing fee or service charge, not a non-taxable interest charge as claimed by Bajaj Finance.

The notice asserts that Bajaj Finance failed to accurately assess and pay the appropriate tax on these charges, and also failed to file the corresponding GST returns.

The investigation was initiated by GST officials in Kerala after an inspection at the Kozhikode branch of the 'myG' retail chain in August 2022 revealed irregularities.

The notice further indicated that the 'upfront interest' was applied regardless of the loan amount, resembling how a service charge is typically implemented.

Following this, executives from Bajaj Finance were summoned by GST officials to provide details about the charges, and in July, the company's office in Pune’s Viman Nagar was inspected as part of the probe.

According to the notice, 65 offices of Bajaj Finance had imposed this 'upfront interest' on customers.