Buy Now, Pay Later (BNPL) Vs. The Credit Card Trap

BNPL vs Credit Cards in India:

Tax, GST, and Compliance Implications You Must Know

By CA Dhiraj Ostwal | Advisory Article | Pune, Maharashtra | June 2025

Buy Now Pay Later has arrived in India in a big way. Platforms like LazyPay, ZestMoney, Simpl, Amazon Pay Later, and Flipkart Pay Later have put short term credit within a click’s reach. Credit cards, of course, have been around far longer. Between the two, Indian consumers, freelancers, and business owners are increasingly spending money they have not yet earned and in many cases, they do not fully understand what that means from a tax and compliance perspective.

This article is not a comparison of interest rates or reward programmes. What it is, is a CA’s perspective on the less discussed consequences of using BNPL and credit cards: how they affect your income tax position, whether GST applies on the charges, what the compliance expectations look like for businesses, and where things can go wrong during an assessment. These are questions that come up regularly in our practice, and the answers are not always simple.

 

At its core, Buy Now Pay Later is a short term credit facility offered typically at the point of sale either by a fintech platform or a bank under a colending or prepaid instrument arrangement. The buyer receives goods or services immediately and repays in two to twelve weeks, sometimes in instalments, sometimes in a single deferred payment. Many BNPL products carry no explicit interest for the deferred period if repayment is on time, but charge late fees and processing charges thereafter.

Credit cards work differently. They are revolving credit facilities regulated by the Reserve Bank of India under the Credit Card and Debit Card Directions, 2022. Credit cards involve a credit limit, a billing cycle, minimum due payments, and high compound interest on outstanding balances, typically between 36percentage and 42percentage per annum. The issuer is always a bank or NBFC. BNPL, on the other hand, can be offered by pure fintechs who operate as payment aggregators or as preapproved loan disbursements.

 

1. BNPL and Credit Card Purchases: The Liability Side

When you purchase goods or services using BNPL or a credit card, the transaction itself is not a taxable event. You have simply deferred payment. What matters is whether the underlying expense is businessrelated or personal, and whether you account for it correctly in the year the expense is incurred.

For individuals: A salaried person buying consumer electronics on BNPL has no income tax obligation. The purchase is personal expenditure. There is nothing to declare.

For businesses and professionals: If a business purchases stock, equipment, or services using a credit card or BNPL, the expense must be booked in the year it is incurred, not the year the card bill is paid. This is an accrual accounting principle that many small business owners routinely ignore. If you are on the mercantile system of accounting which is mandatory for companies and most businesses booking the expense only when the bank statement reflects the payment is incorrect. It creates a timing mismatch that can affect your reported profit and loss.

 

2. Cashback, Rewards, and Waiver Benefits Are They Taxable?

This is one of the most commonly asked questions in our practice, and the law here is genuinely unsettled in the context of individual taxpayers.

For individuals: Cashback and reward points received on personal credit card or BNPL spending are generally not considered taxable income under the current income tax framework. The CBDT has not issued specific guidance categorising these as income. The practical position, supported by the nature of such benefits being discounts rather than receipts, is that they are not taxable for individuals. However, if a cashback is large and is credited as cash to your bank account say, a rs.10,000 cashback on a premium credit card it will appear in your bank statement. If the tax department queries it, you should be able to explain its nature.

For businesses: The position changes entirely when cashback is received by a business. If a company receives cashback of rs.25,000 on its corporate credit card for business purchases, this is a reduction in cost or a business receipt. It must be credited to the Profit & Loss account. Omitting it creates underreporting of income. In practice, we have seen cases where corporate card cashbacks appear in bank accounts but are not reflected in the books, which creates discrepancies visible during scrutiny assessment.

 

3. EMI Conversions and Processing Fees

Banks and card issuers commonly convert large purchases to Equated Monthly Instalments at a rate described as ‘lower than the standard interest rate.’ Two things to note here. First, EMI conversion on a personal purchase does not change the tax position of the underlying transaction. Second, the processing fees and interest paid on EMI are personal finance costs for individuals, not tax deductible.

For businesses: If a company converts a capital asset purchase to EMI via credit card, the interest and finance charges paid during the EMI period can be capitalised as part of the cost of the asset during the period before the asset is put to use, as per Indian Accounting Standards. After the asset is commissioned, the interest becomes a revenue expense and is deductible under Section 37. Businesses must document this distinction carefully.

 

1. GST on Credit Card and BNPL Charges

Financial services attract 18percentage GST in India. This applies to the following charges associated with credit cards and BNPL:

Charge Type	GST Applicable?	Rate
Annual/joining fee on credit card	Yes	18percentage
Late payment charges (BNPL / credit card)	Yes	18percentage
EMI processing fee	Yes	18percentage
Foreclosure / preclosure fee	Yes	18percentage
Merchant Discount Rate (MDR) paid by merchant	Yes	18percentage
Cash advance fee	Yes	18percentage
Foreign currency transaction fee	Yes	18percentage
Interest on revolving credit	Exempt	Nil (lending activity)

 

A critical distinction: interest charged on credit card outstanding balances is a lending activity and is exempt from GST under Entry 27 of Notification No. 12/2017CT(Rate). Processing fees, however, are a service fee and attract 18percentage GST. BNPL late payment fees are similarly taxable. Banks and regulated BNPL lenders issue GST invoices for these charges, and you should receive a tax invoice or a consolidated monthly statement with GST breakup.

 

2. Input Tax Credit on Card and BNPL Charges

This is where things get practically important for registered GST taxpayers.

Annual fee / joining fee: If a business holds a corporate credit card and pays an annual fee, GST input tax credit is available only if the card is used exclusively for business purposes and the card is in the company’s name. ITC on credit card annual fees is available under Section 16 of the CGST Act, provided the expense satisfies the ‘used in the course or furtherance of business’ test.

Late payment charges and EMI processing fees: ITC is available on these as well, subject to the same conditions. The GST invoice must be in the business name with GSTIN mentioned. If the card is in an individual’s personal name and used for mixed business and personal expenses, ITC cannot be claimed on the portion attributable to personal use.

MDR paid by the merchant: Merchants who accept credit card payments pay an MDR to their acquiring bank. This is a taxable service, and the merchant receives a consolidated debit in their bank account. GST ITC on MDR is available to the merchant as a business expense. However, in practice, many small merchants are not registered under GST or do not track MDR as a separate line item. This is a missed ITC opportunity and also a reconciliation gap.

 

3. BNPL for Business Procurement GST Reconciliation Risk

When a business uses BNPL to purchase goods or services from a supplier, the GST on the underlying purchase is between the business and the supplier. The BNPL platform is merely a credit intermediary. The invoice from the supplier must still be in the buyer’s name with the correct GSTIN. If the supplier issues the invoice in the platform’s name or does not issue a proper tax invoice, the business cannot claim ITC regardless of who paid.

In practice, we have seen ecommerce BNPL transactions where the invoice is issued by the marketplace, not the actual supplier, and the GSTIN details are missing or incorrect. This creates an ITC denial risk during GSTR2B reconciliation. Businesses should insist on receiving a proper GST invoice from the ultimate supplier for all B2B BNPL purchases.

 

This distinction is at the heart of most compliance issues we encounter related to credit cards and BNPL.

Many business owners proprietors, partners, directors use a single credit card for both personal and business expenses. From a tax audit perspective, this creates three specific problems:

• The entire card statement gets added to business bank statements during assessment, requiring the taxpayer to segregate and explain each transaction
• GST ITC claimed on mixeduse cards gets scrutinised, as ITC is not admissible on personal expenses
• Interest and finance charges paid on a card with mixed usage cannot be fully deducted as a business expense

 

The correct practice: Maintain separate cards for business and personal use. If that is not feasible, maintain a detailed log of which transactions are business and which are personal, and reconcile this monthly with your bookkeeper. The burden of proof in a tax scrutiny always rests with the taxpayer.

For private limited companies and LLPs, the position is clearer. Company expenses must be paid through company accounts or company credit cards. A director paying company expenses from a personal credit card and claiming reimbursement is acceptable only if the reimbursement process is documented with proper expense claims and supporting invoices. Informal reimbursements without documentation create both income tax and GST complications.

 

1. How BNPL and Card Transactions Appear in Financial Records

For a salaried individual, credit card payments appear in bank statements as outward debits. This does not typically create compliance issues, but in high value assessment situations where the Income Tax Department analyses Annual Information Statement (AIS) data very high credit card spend relative to declared income can attract a query.

The AIS now aggregates data from banks, including high value credit card payments above Rs.1 lakh per month in a year (reported by card issuers under the Statement of Financial Transactions, or SFT). If your annual credit card spend exceeds Rs.10 lakh and this is not explained by your ITR income, you may receive a notice under Section 142(1) or Section 148A.

 

2. RecordKeeping Expectations

Businesses are expected to maintain books of account that reconcile with bank statements. Where credit cards are used:

• Every card transaction must be entered as an expense in the accounts in the period it is incurred
• The card statement should be reconciled to the books at least monthly
• All supporting invoices must be preserved for the period corresponding to the expenses
• If a business has GST ITC claims linked to card payments, the invoices must be GSTR2Bmatched
• Late fees, interest, and finance charges must be classified separately from the underlying expense amount

 

Under Section 44AA, businesses above the prescribed threshold must maintain specified books. There is no exemption for businesses that use digital payments or cards. The medium of payment does not change the obligation to keep books.

 

Example 1: Business Owner Using Corporate Card for Office Expenses

Rahul runs a small consulting firm registered as a private limited company. He holds a corporate credit card from HDFC Bank in the company’s name. In March 2025, he spends Rs.80,000 on office supplies, Rs. 15,000 on a client dinner, and Rs.25,000 on a flight ticket using the card.

The office supplies and flight ticket are claimable business expenses. The client dinner is claimable under entertainment expenses with proper documentation. The GST on the annual card fee (rs.1,500 + rs.270 GST) is claimable as ITC. All three expenses must be booked in March 2025 in the company’s books, even if the card bill is paid in April 2025. The unpaid credit card balance at yearend must appear as a creditor in the balance sheet.

 

Example 2: Freelancer Using BNPL for Equipment Purchase

Priya is a freelance graphic designer filing ITR4 under presumptive taxation at 50percentage of gross receipts (Section 44ADA). She purchases a laptop worth ?95,000 using LazyPay’s 3month BNPL option.

Since she is under presumptive taxation, she does not maintain regular books, and specific asset depreciation claims are not applicable under Section 44ADA. The laptop purchase does not reduce her declared income separately. The BNPL is simply a personal credit transaction. However, if her income grows above rs.75 lakh, she would move out of the presumptive scheme, at which point the laptop becomes a depreciable asset and the interest on BNPL (if any) becomes a deductible finance charge.

 

Example 3: Mismatch During GST Assessment

A textile trader in Pune used a personal credit card for purchasing raw material worth rs.4.5 lakh from a vendor who issued invoices in the trader’s personal name (not his GSTregistered trade name). He claimed ITC of rs.81,000 on these purchases. During a GST audit, the officer found that the invoices were in the individual’s personal name, not the registered taxpayer’s GSTIN. The ITC claim was disallowed in full.

This is a common and preventable mistake. Always ensure that B2B purchases regardless of how you pay carry your GSTIN on the invoice.

 

• Booking credit card expenses when the bill is paid, not when the expense is incurred (accrual error)
• Claiming ITC on credit card annual fees when the card is a personal card or used for mixed expenses
• Not reflecting outstanding credit card balances as liabilities in the balance sheet
• Treating business cashback receipts as personal income or not recording them at all
• Using BNPL for business procurement without ensuring the vendor issues a proper GST invoice in the business name
• Ignoring SFT data in AIS that reflects high credit card spend, without reconciling it to declared income
• Converting large personal purchases to EMI on a corporate card and treating the interest as a business expense

 

BNPL and credit cards are convenient tools. Used thoughtfully and with proper recordkeeping, they do not create tax problems. The issues arise when the lines between personal and business spending blur, when GST invoices are not obtained correctly, when cashbacks go unrecorded, or when card expenses are not matched to the correct accounting period.

From a compliance standpoint, the Income Tax Department’s expanding use of data from financial institutions through AIS, SFT, and GST matching systems means that informal or careless handling of card and BNPL transactions is becoming increasingly visible. The cost of a mismatch is not just a notice; it can result in disallowance of expenses, ITC reversal, interest under Section 234A/B/C, and in extreme cases, penalties.

If you are a business owner or professional whose credit card spend is significant, it is worth sitting down with your CA once a year specifically to review how card and BNPL transactions are being recorded and reported. Prevention is considerably cheaper than resolution.

 

2nd Floor, Shree Krishna, 7, Shirole Lane, Shivajinagar, Pune – 411004 | +9170200 45454 | dhiraj.ostwal@gmail.com

Disclaimer: This article is intended for general awareness and does not constitute specific legal, tax, or financial advice. Please consult a qualified Chartered Accountant for guidance applicable to your situation.