The banking sector is one of the largest services sectors in India. The implementation of the Goods & Services Tax (GST) has proven to be a challenge for the sector on two counts – First, due to the higher GST rates compared to the erstwhile service tax rate (How GST Rates Could Impact Your Business Strategies) and second, due to the vast geographical reach of most banks and GST being based on Supply.
4 critical implications of GST on the banking sector to help banks plan their GST implementation strategy.
1. Substantial Increase in Compliance for Banking Sector
GST is a parallel tax regime where the States and the Center, tax the payer in one go. Hence, banks need to obtain State-wise registration in every State where they have a branch. In case a bank has multiple branches in one State, only one registration is required for all the branches in that State.
However, most banks have a multi-state presence. State-wise registration will therefore lead to a substantial increase in compliance levels, especially because most banks had obtained a ‘centralized’ registration under service tax. So, while earlier the banks were filing only two returns on an annual basis as a service tax assessee, but with GST, the banks are required to file as many as 61 returns per year for every State they are present in (five returns per month plus one annual return).
2. Determining the Place of Supply Could be Critical for Banking Sector
GST is a ‘place of supply’ based tax regime. Hence, for every transaction in GST, the bank needs to determine the place of consumption where GST will be paid. With bank branches conducting several transactions, both within and outside States, determining the place of supply is not very easy.
The GST Law casts the onus of determining whether a transaction is ‘intra-state’ or ‘inter-state’ on the assesse. So, banks need to decide whether the payment is against Central GST (CGST) and State GST (SGST) or Integrated GST (IGST), based on the type of transaction.
Moreover, inter-state supplies of goods or services (or both) between two branches of the same bank, located in two States, also attract IGST. The GST charged is available as credit to the receiving branch; however, tracking such transactions could prove to be a cumbersome task.
Services being intangible in nature, proxy rules/ provisions are prescribed in the GST framework to help the assessee determine the place of consumption. Though, typically, the place of consumption for banking services is the location of the recipient of services on the records of the supplier. But there is ample scope for wrong determination for a pan-India bank as there could be a dispute on who the service recipient is.
Further, in cases where there is a dispute over the place of supply of services, the taxpayer may get entangled in legal disputes. Currently, the GST legislation provides that if an assessee wrongly pays, say CGST and SGST (on a belief that the transaction is intra-state), instead of IGST, then they will have to pay the correct taxes (i.e. IGST) again and claim a refund for wrongfully paid taxes.
Ideally, instead of putting the onus on the taxpayer to determine whether the transaction is intra-state or inter-state, the GST law should provide for a simpler redressal mechanism.
3. Taxability of ‘Interest’
The service tax legislation did not tax ‘interest’. But with GST, the term ‘service’ is defined in a wide manner to cover ‘anything other than goods’ which may cover interest as well.
Governments across the world do not levy GST on interest given the fact that there is always a debate on whether interest is the time value of money or a consideration for lending money. The GST Law in India too should clarify if interest is outside the ambit of GST. If ‘interest’ is not expected to attract GST, it will have implications on input tax credits claimed by banks.
4. Paying GST at the Applicable Rate
With GST, services attract 18% GST. This rate is higher by 3% from the erstwhile service tax rate of 15%. This has made banking services such as the issue of chequebooks and demand drafts more expensive, particularly for retail customers.
Another point to note is that these days banks also deal in commodities such as gold/silver where a concessional GST rate is applicable. Therefore banks need to be careful in paying GST with the appropriate applicable rate on different products.
Read her how banks can benefit with GST data: 10 tips and tricks to jump-start using GST data for lending
If you would like to know more about our GST filing solution, or if you have any questions, please write to support@irisgst.com.
