CA Amitav Das

Registration:

As per Model GST Law, banks having branches in multiple States and Union Territories (UTs) will be required to register in each such State and UT.

Currently, banks follow the Zonal or Regional structure where for one large State, there may be more than one Zone and conversely, one Zone may comprise more than one State.

Accounts and Administration:

  • As GST stands today, transactions between two branches of same bank is set to trigger a tax, which could prove to be cumbersome.
  • GST would require restructuring of accounting, administration and control mechanism in the IT systems and processes of banks to be able to maintain financial records of each State separately.
  • GST being levied on branch transactions could be cumbersome because of the enormous number of financial transactions being carried out.

Services by Bank:

  • Some services by bank to a customer are centralized (Ex: Demat Account, Wealth Management services, bigger home loans etc.) while some others are localized to branches (Ex: Savings account, Personal loan, OD etc.).
  • Banks provide different types of services to customers like Debit Card, Credit Card, Internet banking, Cheque Clearance, NEFT, RTGS, IMPS, Funds Transfer, Demand Draft, Demat Account, Wealth Management services, home loans, Savings account, Personal loan, etc.
  • Bank Head office also provides services to branches which may become taxable under GST. The IT systems of banks need to be upgraded to meet all these requirements related to multiple registrations, determining point of supply of services, compliance needs and Input Service distribution.
  • Currently, the power to levy and collect Service Tax on all services is with the Centre. With the introduction of GST, the States would also be empowered to levy GST on services.
  • Accordingly, on the same activity, there would be two levies, namely Central GST (CGST) and State GST (SGST), levied and administered by the Central Government and State Governments respectively. For interstate supply of
  • Several activities of banks are currently exempt from service tax (Ex: Fund based activities like interest payable on deposits / savings bank accounts and loans disbursed) which would incur GST unless otherwise exclusively exempted.
  • It will be impossible for banks and finance institutions to value services provided by one branch to another and then pay GST on that.

Place of Supply of Goods and Services:

  • In banking industry, it’s interesting to know the place of business.
  • Even though the person is having an account in a single location, he can do the transactions across globe through internet banking.
  • The account holder can use his mobile or laptop and can do transactions from anywhere.
  • A Customer having an account in Chennai may do the transaction from Delhi and can transfer money to persons from Kolkata having account in Mumbai. Here point of supply identification is very much required for taxation purpose under GST.
  • As per law even though it can be tracked it will be cumbersome tasks and determining point of supply of services would add significantly to the compliance cost.
  • Taking the example above, is it required to take the registration across India in each state and Union Territory to abide by the laws of each state and Union Territory.
  • As per section 6(13), in the case of banking and other financial services (BOFS), the place of supply shall be the ‘location of the recipient of service’ on the records of supplier of services.
  • Example- Let a person X applied for a personal loan to PQR Bank.
    • PQR bank did the following activities:

♦ Initial verification is done by outsourced local agencies,

♦ Loan processing is done centrally,

♦ Disbursement done locally,

♦ Repayment done by net banking/ECS mandate.

Under such circumstance determining point of supply at each stage is very cumbersome.

  • In order to determine the GST, it would be necessary to determine the place of receipt of supply of service and place of supply of service.
  • It is possible that actual recipient of such services may be different offices/ plants of the customer situated in different States and therefore, there could be a doubt as to whether each time, the bank would be required to capture the location of the recipient of service for each transaction.

Invoicing:

  • Section 25 of the Model Law requires uploading of invoices on Goods and Services Tax Network (GSTN) by 10th of the next month.
  • It means wherever the recipient of service wants to avail input tax credit, each and every document, where under certain fee or commission or charges have been charged and on which GST is levied, is required to be uploaded electronically on the GSTN by the service provider.
  • It is a fact that banks do not issue commercial invoices for every service rendered.
  • It would practically be a very difficult task to issue invoices for such small amounts and uploading them on GSTN.

Re­possession of Assets of Defaulters

  • As per existing law and practice, when a bank re­possesses assets from a defaulter of loan and sells the same, VAT is paid by the bank as a ‘dealer’ in terms of State VAT laws. Treatment of this under GST will be quite interesting, which need to be looked upon.

Difficulties to Banking Industry:

  • All the bank need to register for their all office location.
  • They have to maintain separate books of account to have a control for all input tax credit and utilized and unutilized credit.
  • Due to registration of all location Many banks and financial institutions may be in for a lot of trouble as they could just see the complexity in paying taxes increase under the GST.
  • Complying with the requirements of reverse charge and partial reverse charge mechanism would add to further compliance costs.

Benefits to Banking industry:

  • Bank will be able to set off their GST liabilities against credit received on purchase of goods.
  • Under the existing CENVAT mechanism, banks are eligible to take partial credit of excise duty and service tax paid on procurement of qualifying goods and services which are used for provision of output service.
  • Banks do not get input tax credit of State VAT paid on any goods procured by them. As all these indirect taxes will be subsumed in GST, banks will be able to take credit of GST paid on procurement of goods as well.
  • Input tax credit is not allowed as per current CENVAT rules. But under GST regime input tax credit will be allowed which would be used by a bank for making outward supply in the course of
  • GST Will help to reduce tax evasion. Under GST doing business will be easy. The increase in business will lead to additional demand of funds. Addition demand of funds will lead to increase in number of transactions in the bank as the business and current scenarios ask to go for digital transaction.

Author Bio

Name: Amitav
Qualification: CA in Job / Business
Company: N/A
Location: Tamil Nadu, IN
Member Since: 16 Oct 2017 | Total Posts: 10

My Published Posts

More Under Goods and Services Tax

Posted Under

Category : Goods and Services Tax (5345)
Type : Articles (14986)
Tags : goods and services tax (3888) GST (3480)

4 responses to “Impact of GST on Banking Sector”

  1. RajanChauhan says:

    Truely said..

    The Implementation of GST has created an excitement in the banking sector. The consumer are supposed to pay 3% or more under new GST system. Most confusion is in Intra-state and inter-state transactions.

  2. Ashish Shrivastava says:

    Hi,
    I have done my agreement of a under construction property on 27th June. But the loan disbursement is yet to be done and that will be done after 1st of July.

    I have already paid the service Tax and VAT while dong the agreement @4.5% and 1% respectively.

    Could you please suggest what will happen if the loan to the builder is disbursed after 1st July and GST gets applies on the same.

  3. Rajan Bhatia says:

    Sir, Request you to mail me a ppt on GST on banking sector at bhatiarajan4@gmail.com

  4. Manish Rathod says:

    How much GST will be charged on creditcard loan interest

Leave a Reply

Your email address will not be published. Required fields are marked *