CA Nikhil Kumar
The banking industry is covered by the erstwhile service tax law and same was levied on the service provided by the banking sector to its customers until the introduction of Goods & Service Tax Act. In this article we would like to explain the important GST provisions relating to the major services offered by the banking industry to its customers.
Chargeability : Now a days banking industry provides wide range of services to its customers. It includes traditional banking services, insurance agency services, mutual fund agency services and many more . The most of the services come within the ambit of levy of GST and few services are being given exemption by way of notification. The following are the exemptions given to the banking industry:
(1) “Services by way of
(a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services);
(b) inter se sale or purchase of foreign currency amongst banks or authorized dealers of foreign exchange or amongst banks and such dealers.
By this entry the interest/ discounts on loans/ deposits/ advance are being given exemption. The sale and purchase among the banks and authorised dealers of foreign exchange are also given exemption. The interest on credit card has been specifically excluded.
The 31st GST Council meeting , has made recommendations to exempt all banking services given to Pradhan Mantri Jan Dhan Yojna Accounts (Basic Saving Deposit Accounts) (This will be effective from the date of Notification/Circular to be issued by CBIC).
Explanations as given in the notification no. 12/2017 Central Tax(Rate) , dated 28.06.2017
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 utilised;
Authorised Dealer of Foreign Exchange: “Authorised Dealer of Foreign Exchange” shall have the same meaning assigned to “Authorised person” in clause (c) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);
(2) “Services by an acquiring bank,
to any person in relation to settlement of an amount upto two thousand rupees in a single transaction transacted through credit card, debit card, charge card or other payment card service.
Explanation.’ For the purposes of this entry, “acquiring bank” means any banking company, financial institution including non-banking financial company or any other person, who makes the payment to any person who accepts such card.
This entry represents the one time settlement payment to its customer which took place through credit card, debit card, charge card or other payment card service.
(3) “Services by the following persons in respective capacities ‘
(a) business facilitator or a business correspondent to a banking company with respect to accounts in its rural area branch;
(b) any person as an intermediary to a business facilitator or a business correspondent with respect to services mentioned in entry (a); or
(c) business facilitator or a business correspondent to an insurance company in a rural area.”
The business facilitator or a business correspondent plays a very vital role in the present day of banking . Such persons works like a bridge between the rural economy and the banking companies . The intention of the government is to take steps to make banking facilities more closer to rural india. Therefore the government had given this exemption specifically to rural area only.
Explanations as given in the notification no. 12/2017 Central Tax(Rate) , dated 28.06.2017
“Business facilitator or business correspondent” “An intermediary appointed under the business facilitator model or the business correspondent model by a banking company or an insurance company under the guidelines issued by the Reserve Bank of India;
Banking company : “The banking company has the same meaning as assigned to it in clause (a) of section 45A of the Reserve Bank of India Act,1934(2 of 1934);
Intermediary : “Intermediary” has the same meaning as assigned to it in sub-section (13) of section 2 of the Integrated Goods and Services Tax Act, 2017;”
Rural Area: “Rural area” means the area comprised in a village as defined in land revenue records, excluding-
the area under any municipal committee, municipal corporation, town area committee, cantonment board or notified area committee; or any area that may be notified as an urban area by the Central Government or a State Government;
We can make a illustrative list to understand the exempted , taxable and not chargeable services under the provisions of GST Act :
| SI. No. | Nature of Service | Whether Exempt , Taxable or Not Chargeable |
| 1. | Interest/ Discount on Loans / Deposits or Advances | Exempt |
| 2. | Services provided to Reserve Bank of India | Taxable |
| 3. | Processing Fees on Loans | Taxable |
| 4. | Documentation Charges | Taxable |
| 5. | Ledger Folio Charges | Taxable |
| 6. | Invoice / Cheque or Other Similar Discounting | Exempt (Such discounting is exempt as the same is nothing but the extending the credit facility . However if any extra amount charged in the name of commission, fees, brokerage etc. than it will be chargeable.) |
| 7. | Demand Draft Charges | Taxable |
| 8. | Issuance of Bank Statement Charges | Taxable |
| 9. | Stop Payment Charges | Taxable |
| 10. | Standing Instruction Charges | Taxable |
| 11. | Inspection Charges | Taxable |
| 12. | Bank Guarantee Commission Charges | Taxable |
| 13. | Issuance of Letter of Credit | Taxable |
| 14. | Credit Card Services | Taxable |
| 15. | Intermediary Services | Taxable |
| 16. | Collateralised Borrowing and Lending Obligations (CBLO) Transactions | Exempt |
| 17. | Sale of Derivatives | Not Chargeable (Since derivatives falls within the definition of securities which is neither goods nor services as defined by the CGST Act hence they are not liable to GST. However if any extra amount charged in the name of commission, fees, brokerage etc. than it will be chargeable. |
| 18. | Future Contracts | Not Chargeable (Since it is financial derivative and falls within the definition of securities which is neither goods nor services as defined by the CGST Act hence they are not liable to GST. However if any extra amount charged in the name of commission, fees, brokerage etc. than it will be chargeable. |
| 19. | Forward Contract in Commodities or Currencies | Where the settlement takes place by way of actual delivery of underlying commodity/currency, then such forward contracts would be treated as normal supply of goods and liable to GST. Where the settlement takes place by way of net settlement of differential of the forward rate over the prevailing market rate on the settlement date, the same would be falling within the purview of ‘securities’ as and securities are neither ‘goods’ nor ‘services’ as defined in the CGST Act, 2o17, therefore future contracts are not chargeable to GST. |
| 20. | Repos and Reverse Repos transactions | Exempt (The margins , called in these transactions are repo rate and reverse repo rate which are nothing but the interest charged for lending or borrowing and hence exempt.) |
| 21. | Income From Commercial Paper or Certificate of Deposit | Exempt (These instruments are used for lending and borrowing money wherein the consideration is represented by the way of discount or subscription to CP or CD which are in the nature interest etc. hence exempt.) |
| 22. | Promissory Notes | Not Chargeable ( As it is covered in the definition of “money” as given by the CGST Act, 2017 which is neither goods nor services and hence exempt. However if any extra amount charged in the name of commission, fees, brokerage etc. then it will be chargeable.) |
| 23. | Assignment or Sale of Secured or Unsecured Debts | Not Chargeable ( Sale , transfer or assignment of debts falls within the purview of the actionable claims and only actionable claims in respect of the lottery, betting and gambling are chargeable under the provisions of CGST Act, 2017 therefore all other actionable claims are not chargeable. ) |
| 24. | Interest on Financial Lease | Exempt (The finance lease method of borrowing against the asset and therefore interest charged thereon will be exempt.) |
| 25. | Interest on Gold Loan | Taxable (The gold (metal) loan only provides an option to the jeweler to avail the loan and pay for the gold(metal) at a future date and for this facility jeweler pays interest to the bank . As the grant of loan and levy of the interest is dependent upon the purchase of gold therefore it is a part of the same transaction or facility. Thus the interest , which is the consideration , will not be exempt ) |
| 26. | Loan takeover transactions | Taxable (GST will be charged on the processing fees charged for the takeover of the loan.) |
| 27. | Sale of Repossessed Assets | Taxable |
| 28. | Securitisation Transactions | Not Chargeable (The securitization assets are in the nature of securities and hence not liable to GST.) |
| 29. | Charges on Cheque Bouncing | Taxable ( Recent ruling by the Authority for Advance Ruling , Maharashtra) |
Place of supply :
As per Sec.12(12) of the IGST Act the place of the supply in case of Banking Services :
(i) If the recipient location exists in the records of the supplier: The place of supply will be location of the recipient.
(ii) If the recipient location not exist on supplier’s record : The place of supply will be location of the supplier.
Further as per Sec. 13(8a) of the IGST Act , 2017 ,the place of supply of services supplied by a banking company located in India to account holders located outside India is the location of the service provider i.e. banking company.
“Account” has been defined in Explanation (a) to section 13(8) of the IGST Act, 2017 to mean an account which bears interest to the depositor, and includes a non-resident external (NRE) account and a non-resident ordinary (NRO) account.
Liability to issue invoice
As per the provisions of proviso to Rule 47 of the CGST Rules 2017, the banking companies may issue invoices within 45 days from the date of the supply of services . However as per the sub rule (2) of Rule 54 of CGST Rules 2017 , such entities may issue any other document in lieu of the tax invoice. Hence such entities may issue a consolidated statement/ invoice/ advice to the customer at the end of the month, with the details of all the charges levied during such month and GST charged thereon.
According to clause (c) of sub-section (3) of section 31 of the CGST Act, 2017 read with Rule 49 of the CGST Rules, 2017, the banks are required to issue ‘Bill of Supply” in case of exempt services provided by the them . Further, in view of the provisions contained in sub-rule (5) of rule 54 of the CGST Rules, 2017, banks may issue any other document in lieu of bill of supply.
In case of goods or services, the registered person procuring goods or services from an unregistered person located in India or services from a person located outside India is required to raise a self-invoice on the date of receipt of such supplies. Banks may raise a self-invoice, debit note or credit note for each such supply. As the import of goods would be under the cover of a bill of entry, there is no need to raise a self-invoice.
It may, however, be noted that section 9(4) of the CGST Act, 2017 / section 5(4) of the IGST Act, 2017 has been suspended vide notification No. 38/2017-Central Tax, as amended from time to time.
Input Tax Credit available to the Banks
The detailed provisions regarding the Input Tax Credit available to the banking companies are given in the Sec.17(4) of the CGST Act ,2017. Accordingly such entities have two options regarding to the availment of input tax credit namely:
(i) To avail the input tax credit only which are attributed to the taxable supplies made or effected by such entities.
(ii) To avail the input tax credit , every month an amount equal to 50% of the eligible input tax credit on inputs, capital goods and input services in that month and the rest will lapse .
Provided that once the option regarding the availment of credit has been opted by such entities than it can not be changed during the remaining financial year.
The above referred restriction of 50% shall not apply to the inter branch supplies between the registered branches having same PAN in India .
Furthermore section 17(4) of the CGST Act, 2017 is applicable qua each registration and not for the Bank as a whole, provided each of the business verticals is separately registered.
The procedure regarding the claim of input tax credit , in case of banking companies , has been given in the Rule 38 of the CGST Rules,2017.
To conclude the topic we can safely say that the banking industry has its peculiar characteristics and the provisions are made to match the same . Also with the passage of time the government is taking care of need for necessary changes which are required to be taken in the greater interest of the country.
Disclaimer: The author has defined major aspects related to the topic according to its own understanding to the subject . Further the Interpretations, explanations etc. given in the above mentioned article is the personal opinion of the author and one may differ on certain issues . Therefore readers/ users of this article are strictly advised to refer original act, notification, circular, rules etc. before acting upon it. The author is not responsible for any type of loss occurred due to the above.
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PLEASE EXPLAIN POINT NO 25 INTEREST ON GOLD LOAN TAXABLE??