Introduction
The key question under discussion is whether the Reserve Bank of India (RBI) qualifies as a banking company under Section 17(4) of the CGST Act, 2017, thereby making it subject to the 50% Input Tax Credit (ITC) restriction.
This article explores whether the Reserve Bank of India (RBI) qualifies as a banking company under Section 17(4) of the CGST Act, 2017, thereby making it subject to the 50% Input Tax Credit (ITC) restriction.
To address this, the article follows a structured approach:
1. Understanding Section 17(4) of the CGST Act – Explains the ITC restriction applicable to banking companies and financial institutions.
2. Definition of “Banking Company” – Examines whether the term is defined under the CGST Act, IGST Act, RBI Act, and Banking Regulation Act.
3. Analysis of RBI’s Business Activities – Reviews Section 17 of the RBI Act to determine whether RBI engages in banking as per legal definitions.
4. Key Distinctions between RBI and Banking Companies – Highlights why RBI, as a central bank, differs from commercial banking institutions.
5. Conclusion – Summarizes the findings and clarifies why RBI is not covered under Section 17(4) of the CGST Act.
Understanding Section 17(4) of the CGST Act
Section 17(4) states:
“A banking company or a financial institution, including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans, or advances shall have the option to either comply with the provisions of subsection (2) or avail, every month, an amount equal to fifty percent of the eligible input tax credit on inputs, capital goods, and input services in that month, with the rest lapsing.”
Provided that the option once exercised shall not be withdrawn during the remaining part of the financial year:
Provided further that the restriction of fifty per cent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.”
In the following parts of this article, we will first explore the definition of a ‘banking company’ under various relevant statutes, including the CGST Act, IGST Act, RBI Act, and the Banking Regulation Act. We will then analyse whether the Reserve Bank of India qualifies as a banking company based on these definitions and its actual business activities. This will include a review of RBI’s role and functions in the financial system, comparing its operations to those of commercial banking institutions. Finally, we will conclude by determining whether, based on these findings, the 50% Input Tax Credit restriction under Section 17(4) of the CGST Act is applicable to the RBI.
Analysis of the Term “Banking Company”
1. Absence of Definition in the CGST Act
- The term ‘banking company’ is not defined under Section 2 or Section 17 of the CGST Act, nor anywhere else in the Act.
2. Definition under the IGST Act, 2017
- Section 13(8) of the IGST Act defines ‘banking company’ as: “Banking company” shall have the same meaning as assigned to it under clause (a) of Section 45A of the Reserve Bank of India Act, 1934 (2 of 1934).”
- While Section 17 of the CGST Act does not explicitly adopt this definition, it may be considered applicable in the given context.
3. Definition under the Reserve Bank of India Act, 1934
- Section 45A of the RBI Act defines a banking company as: “A banking company as defined in Section 5 of the Banking Regulation Act, 1949, and includes the State Bank of India, any subsidiary bank under the State Bank of India (Subsidiary Banks) Act, 1959, any corresponding new bank constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and any other financial institution notified by the Central Government.”
4. Definition under the Banking Regulation Act, 1949
- Section 5(c) of the Banking Regulation Act defines a banking company as:
“Any company that transacts the business of banking in India.”
- Section 5(b) further defines ‘banking’ as:
“The accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order, or otherwise.”
Does RBI Qualify as a Banking Company?
5. RBI’s Permitted Business Activities (Section 17 of the RBI Act)
- Section 17 of the RBI Act outlines the business RBI may transact. It states:
“The Bank shall be authorized to accept money on deposit without interest from, and collect money for, the Central Government, the State Government, local authorities, banks, and any other persons.”
6. Scope of “Any Other Persons” Under Section 17(1)
- Does this include the general public?
- The phrase “any other persons” does not refer to the general public but rather to designated financial entities, statutory bodies, and government institutions.
- RBI does not accept deposits from the public for lending or investment, which is a key requirement for being classified as a banking company.
7. Distinguishing RBI from Banking Companies
- Regulatory Role, Not Commercial Banking:
- RBI is India’s central bank, responsible for monetary policy, financial stability, and supervision of banks, rather than conducting commercial banking activities.
- No Public Transactions:
- Unlike banking companies, RBI does not issue cheque books, provide ATM services, or allow public withdrawals.
Conclusion
Based on the legal definitions and RBI’s business scope:
- RBI does not meet the definition of a banking company under the Banking Regulation Act, RBI Act, or CGST Act.
- Since RBI does not accept public deposits for lending or investment, it is not covered under Section 17(4) of the CGST Act.
- Therefore, RBI is not subject to the 50% ITC restriction applicable to banking companies and financial institutions under the CGST/SGST Acts.
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Author: Adv. Vivek Laddha, Founder- Law Brothers
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