Continuing our series Confusions in GST, this time we will be discussing about:

Industry: Finance Industry

Topic: Input Tax Credit

A brief description about what is input tax credit – Input Tax Credit is the tax paid on purchases of goods and services and which can be utilized for payment of tax on sale of goods or services.

Here we are discussing about ITC in Institutions and Companies which engage in granting and accepting loans and deposits.

Accepting and Granting Loans is a service for which consideration is in the form of Interest. This Interest is exempt from GST and specifically comes under Nil Rated Supplies. However all other charges which Banks and other such Institutions charge are taxable under GST. Even Penal Interest and Stock Interest are also taxable under GST. Therefore these Institutions provide both taxable and exempt supplies simultaneously.

There is a provision in GST law that where a taxpayer supplies both taxable and exempt supplies then such taxpayer will have to reverse its Input credits on purchases which are commonly made for both exempt and taxable outward supplies. The method of reversal is given in rules and it provides that the reversal shall be done in the proportion of Exempted Turnover to Total Turnover for that month.

This method requires classification of outward supplies and classification of purchases whether they re used for taxable outward supplies or they are used for Exempt Outward Supplies or they are for common supplies. As Financial Institutions like banks have a lot of transaction on per day basis and business being spread out throughout the Nation it may become cumbersome for such financial institutions to calculate reversal by this method. This method is also not cost effective because it requires immense efforts to calculate the exact amount and the corresponding benefit might not be that fruitful.

Considering the above situation the Act has allowed such financial institutions including NBFC’s to take 50% of all eligible input credits [not blocked by section 17(5)] and the rest shall lapse. The Act provides that 50% credits shall be taken for all inputs, capital goods and input services. It is also stated that once this option is exercised then this method will be carried on for the whole financial year.

Now consider a situation where the financial institution has exercised the option of availing 50% of Input Tax Credit and apart from lending and accepting deposits it also engages in other taxable business.business. The question arises whether input taxes on inputs directly related to the other taxable business shall be available on full or they also have to be reversed by 50% along with other inputs.

Many Financial Institutions provide other services along with lending money like insurance, portfolio management, trading in gold coins, bullion etc. Now take trading in gold. Trading in gold is a taxable business. Whatever you buy, you sell that quantity. Now the bank (assuming it has availed the option of 50% credits) will sell gold with 3% tax but while buying the same will take credits of whole 3% or 1.5%?. This is just one example, Public Sector Financial Institutions carry on many businesses which are totally unrelated to finance. They will also face similar problems.

Possible solutions may be either not to take the option but that will increase workload immensely OR separate registration as different business vertical but then imagine different verticals for each business and each state will result in number of registration for the same bank and this will increase the compliance workload.

What are your comments on the same? Let me know in the comments section.

Thank You.

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Qualification: CA in Practice
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Location: Kanpur, Uttar Pradesh, IN
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