Banks and financial institutions provide a bouquet of financial services relating to lending or borrowing of money or investments in money. In this article, I would be discussing various exemptions available under GST for availing banking services.
Services provided by/to RBI
All services provided by the Reserve Bank of India are covered under Entry 26 of Notification 12/2017 Central Tax (Rate) dated 28 June 2017 and are thus, exempt from GST. However, services provided to the Reserve Bank of India are not covered under said entry and would be taxable unless otherwise covered in any other entry of the Notification.
Specified Banking Services
Specified banking services exempt from GST vide Entry 27 of Notification 12/2017 Central Tax (Rate) dated 28 June 2017 have been discussed below:
Exempted Banking Services:-
(A) Deposits, loans or advances: Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount: This entry covers any such service wherein moneys due are allowed to be used or retained on payment of interest or on a discount. The words used are ‘deposits, loans or advances’ and have to be taken in the generic sense. They would cover any facility by which an amount of money is lent or allowed to be used or retained on payment of what is commonly called the time value of money which could be in the form of an interest or a discount. This entry would not cover investments by way of equity or any other manner where the investor is entitled to a share of profit.
(B) Interest: Interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.
Illustrations of services exempt under Entry 27 are –
1. Fixed deposits or saving deposits or any other such deposits in a bank or a financial institution for which return is received by way of interest.
2. Providing a loan or overdraft facility or a credit limit facility in consideration for payment of interest.
3. Mortgages or loans with a collateral security to the extent that the consideration for advancing such loans/advances are represented by way of interest.
4. Corporate deposits to the extent that the consideration for advancing such loans or advances is represented by way of interest or discount.
5. Invoice discounting/cheque discounting or any other similar form of discounting is covered only to the extent consideration is represented by way of discount as such discounting is a manner of extending a credit facility or a loan.
6. Any interest/ delayed payment charges charged to clients for delay in payment of brokerage amount/ settlement obligations/ margin trading facility: is exempt from GST since settlement obligations/ margin trading facilities are transactions which are in the nature of extending loans or advances and are covered by Entry 27.
7. Collateralized Borrowing and Lending Obligations (CBLO) transactions: In CBLO transaction, the borrowing bank pays an amount as consideration to the lending bank for funds provided by it for a short term. Such amount would qualify as ‘consideration represented by way of interest or discount’ and hence, would exempt from GST under Entry 27. However, if any charges or fees are levied for such transactions, the same would be a consideration and would be liable to GST.
8. Instruments like repos and reverse repos: Repos and reverse repos are financial instruments of short-term call money market that are normally used by banks to borrow from or lend money to RBI. The margins, called the repo rate or reverse repo rate, in such transactions are nothing but interest charged for lending or borrowing of money. Thus, they have the characteristics of loans and deposits for interest and are accordingly exempt from GST under Entry 27.
9. Income from Commercial Paper (CP) or Certificates of Deposit (CD): The transactions in Commercial Paper (‘CP’) and Certificate of Deposit (‘CD’) are in the nature of promissory notes. Consequently, they are included in the term ‘money’ and hence, are not chargeable to GST. With regard to income from CPs or CDs, since these are the instruments for lending or borrowing money wherein consideration is represented by way of a discount or subscription to CPs or CDs, the same would be covered by entry 27 and is not liable to GST. However, if some service charges or service fees or documentation fees or broking charges or such like fees or charges are charged, the same would be a consideration for supply of services and liable to GST.
10. Assignment or sale of secured or unsecured debts: For the purpose of Supply under GST, only actionable claims in respect of lottery, betting and gambling would be taxable under GST. Where sale, transfer or assignment of debts falls within the purview of actionable claims, the same would not be subject to GST. Further, any charges collected in the course of transfer or assignment of a debt would be chargeable to GST, being in the nature of consideration for supply of services.
11. Interest on debt instruments: As debt instruments such as debentures, bonds etc. are in the nature of loans, interest thereon will be exempt from GST.
Not Exempted Banking Services:
1. Service charges/ fees, documentation fees, broking charges, administrative charges, entry charges or such like fees or charges collected over and above interest on loan, advance or a deposit are not exempt and liable to GST.
Similarly, if some service charges or service fees or documentation fees or broking charges or such like fees or charges are charged on a derivative/ future contract/ forward contract/ invoice or cheque discounting, the same would be a consideration for supply of service and liable to GST.
Example- Indiana Bank has collected processing fees from its customers on sanction of loan to them. Interest does not include processing fee on sanction of the loan. Hence, the processing fee is not covered in Entry 27 and is thus, taxable. Similarly, minimum balance charges collected by the bank from current account and saving account holders are considered as charges collected over and above interest on loan. Hence, the same are not covered in Entry 27 and is thus, taxable.
2. Charges for late payment of outstanding dues on credit card: Interest charged on outstanding credit card balances has been specifically excluded from Entry 27. Hence, the same is liable to GST.
Example- XYZ Bank collects interest on credit card issued to its customers by it. Interest involved in credit card services is specifically excluded from Entry 27 & is thus, taxable.
3. Interest on a finance lease transaction: A finance lease is a method of borrowing against the asset. The interest represents the time value of the money expended by the bank in financing the asset. However, in a financial lease the ownership of the asset is with the bank. In essence, it is a ‘purchase the asset and lend it further’ transaction for bank. Therefore, neither the services are purely in the nature of extending loans nor the consideration for a financial lease is purely in the nature of interest. Thus, interest on finance lease transactions will be taxable under GST.
4. Transactions where loan of one bank is taken over by another bank: GST will be liable on any transaction processing fees levied for such takeover of loans, but not on the interest component (as interest is exempted).
5. Interchange fees on card settlement fees paid/ shared by banks: Fees charged for card settlement is a consideration which is part of a separate transaction between the banks which are parties to this transaction and shall be liable to GST.
6. Ancillary Charges on Securitization transactions undertaken by banks: Securitized assets are in the nature of securities and hence are not subject to GST. However, if some service charges or service fees or documentation fees or broking charges or such like fees or charges are charged, the same would be a consideration for provision of services related to securitization and would be liable to GST.
7. Additional/ penal interest on the overdue loan: In cases where the Equated Monthly Instalment (EMI) is not paid at the scheduled time, there is a levy of additional/ penal interest on account of delay in payment of EMI.
There may arise a doubt as to whether this additional / penal interest on the overdue loan is exempt under Entry 27 or such penal interest is to be treated as consideration for liquidated damages [amounting to a separate taxable supply of services under GST covered under para 5(e) of Schedule II of the CGST Act, 2017 i.e. “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”]. There are two transaction options involving EMI that are prevalent in the trade. These two options, along with the GST applicability on them, have been explained with the help of illustrations as under –
Example A: (Case where penal interest will be included in the value of supply)
X sells a mobile phone to Y. The cost of mobile phone is ` 40,000. However, X gives Y an option to pay in installments, ` 11,000 every month before 10th day of the following month, over next four months (` 11,000 × 4 = ` 44,000).
As per the contract, if there is any delay in payment by Y beyond the scheduled date, Y would be liable to pay additional/ penal interest amounting to ` 500/- per month for the delay. In some instances, X is charging Y ` 40,000 for the mobile and is separately issuing another invoice for providing the services of extending loans to Y, the consideration for which is the interest of 2.5% per month and an additional/ penal interest amounting to ` 500 per month for each delay in payment.
In this case, the amount of penal interest is to be included in the value of supply. The transaction between X and Y is for supply of taxable goods i.e. mobile phone. Accordingly, the penal interest would be taxable as it would be included in the value of the mobile, irrespective of the manner of invoicing.
Example B– (Case where penal interest will not be included in the value of supply)
X sells a mobile phone to Y. The cost of mobile phone is ` 40,000. Y has the option to avail a loan at interest of 2.5% per month for purchasing the mobile from M/s. ABC Ltd. The terms of the loan from M/s. ABC Ltd. allows Y a period of four months to repay the loan and an additional/ penal interest @ 1.25% per month for any delay in payment. Here, the additional/ penal interest is charged for a transaction between Y and M/s. ABC Ltd., and the same is getting covered under exemption Entry 27.
Consequently, in this case the ‘penal interest’ charged thereon on a transaction between Y and M/s. ABC Ltd. would not be subject to GST as the same would be covered under said exemption entry. However, any service fee/ charge or any other charges, if any, are levied by M/s. ABC Ltd. in respect of the transaction related to extending deposits, loans or advances does not qualify to be interest as defined in exemption notification, and accordingly will not be exempt. Moreover, the value of supply of mobile by X to Y would be ` 40,000 for the purpose of levy of GST.
Since this levy of additional/ penal interest satisfies the definition of “interest” as contained in Entry 27 above, the same cannot be treated as consideration for liquidated damages. Consequently, transaction of levy of additional/ penal interest does not fall within the ambit of Schedule II i.e. “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” [Circular No. 102/21/2019-GST dated 28.06.2019].
8. Services provided by banks or authorized dealers of foreign exchange by way of sale of foreign exchange: The term ‘authorised dealer of foreign exchange’ means an authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised under section 10(1) of FEMA, 1999 to deal in foreign exchange or foreign securities [Section 2(c) of the Foreign Exchange Management Act, 1999]. It is important to note that such services provided to general public will not be covered in this entry as this entry only covers sale and purchase of foreign exchange between banks and authorized dealers of foreign exchange or between banks and such dealers.
Thus, in view of the above exemption notification if you are getting any composite supply and the principal supply is exempted as per the entry 27 of the Notification, the taxable supply for the composite supply would be nil as the principal supply is exempted. Moreover, foreign exchange facilities provided by banks to customers are not exempted as they are outside the purview for B2C basis.