Background:
GST is payable on all inter-State and Intra-State supplies of goods or services or both. The term ‘security’ is excluded from the definition of goods and service however, as per section 17(3) of the CGST Act, 2017, the transaction in security is considered to be an exempt supply for the purpose of reversal of input tax credit under rule 42.
At present India is a favoured destination for the global investors. People all over the world especially the Non-Resident Indians (NRIs) prefers to invest in Indian stock market since the Indian Stock Market is on its boom.
SEBI regulates the activities of the Foreign Portfolio Investors (PFIs) in India. As per the provisions of the of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019, (‘SEBI PFI Regulation’) every FPI is required to appoint a local custodian to manage the transactions in securities undertaken in India. The banks are appointed as custodian to manage the transactions in securities in India by the PFIs. The main activity carried out by banks as a custodian is maintaining account of the securities held by the FPIs.
As per the provisions of Securities and Exchange Board of India (Custodian of Securities) Regulations 1996, ‘Custodial Services’ in relation to securities means safekeeping of securities of a client and providing services incidental thereto, and includes-
(i) maintaining accounts of securities of a client;
(ii) collecting the benefits or rights accruing to the client in respect of securities;
(iii) keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client; and
(iv) maintaining and reconciling records of the services referred above.
It is also important to understand here that as per SEBI PFI Regulation, a FPI is allowed to invest only in the following securities namely;
(a) shares, debentures and warrants issued by a body corporate;
(b) units of schemes launched by mutual funds;
(c) units of schemes floated by a Collective Investment Scheme;
(d) derivatives traded on a recognized stock exchange;
(e) units of real estate investment trusts, infrastructure investment trusts and units of Category III Alternative Investment Funds registered with the Board;
(f) Indian Depository Receipts;
(g) any debt securities or other instruments as permitted by the RBI for PFIs to invest; and
(h) such other instruments as specified by the Board from time to time.
The place of supply of service where either the supplier or the recipient is located outside India, shall be determined as per the provisions of section 13 of the IGST Act, 2017. As per section 13(2) of the IGST Act, 2017 the place of supply of services shall be the location of the recipient except in case of the services specified in section 13(3) to section 13(13).
Section 13(8) specifically provides that, in case of services supplied by a banking company, or a financial institution, or a nonbanking financial company, to ‘account holders’ shall be the location of the supplier. Further, the explanation to the said provision provides that for the purpose of this sub-section the ‘account’ means an account bearing interest to the depositor includes a non-resident external account and a non-resident ordinary account.
However, the view taken by the GST officers in certain cases was that the place of supply in case of Custodial Services provided by Banks to PFIs would be determined as per Section 13(8)(a) of the IGST Act, 2017 i.e. the location of the service provider (banks or financial institutions).
CBIC in its FAQ on Financial Services Sector had clarified the meaning of ‘account’ as under;
“50. Which services will qualify as services provided to ‘account holder’ as per Section 13(8) 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.
Services provided to holders of demand deposits, term deposits, NRE account and NRO account outside India will be covered by the definition of account referred to above. Examples of such services are:
(i) services linked to or requiring opening and operation of bank accounts, such as, lending and deposits;
(ii) transfer of money including telegraphic transfer, mail transfer, electronic transfer etc.
51. Which services do not qualify as services provided to ‘account holder’ as per Section 13(8) of the IGST Act, 2017 and thus the place of supply will be the location of the recipient of services?
Following are examples of services that are generally not provided by a banking company or financial institution to an account holder (holder of a deposit account bearing interest to the depositor including NRE and NRO account holders) in the ordinary course of business:
(i) financial leasing services including equipment leasing and hire-purchase;
(ii) merchant banking services;
(iii) securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money changing;
(iv) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services;
(v) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy;
(vi) banker to an issue service.
In case of any service which does not qualify as service provided to an account holder, the place of supply for such services shall be the location of the recipient of services.”
The above clarification has been fair enough to clarify the meaning of account holder for the purpose of deciding the place of supply as per section 13 of the IGST Act, 2017. However, the actions taken by the field formation contrary to above, compelled the taxpayers to seek the clarification with regard to place of supply in case of custodial services provided by the Indian banks.
It is also worth mentioning that in addition to the clarification given in the aforementioned FAQ, a similar clarification was available in the Education Guide to Service Tax, a very good document which had clarified many issues in the service tax regime. Though this was not in the form of Circular, this was prepared by the officers of TRU, CBEC after thorough research and made available in the CBEC website, hence had the effect of a circular.
The Place of Provision of Service under Service Tax was governed by the Place of Provision of Supply Rules, 2012. Rule 9(a) of the Place of Provision of Supply Rules, 2012 was identical to section 13 (8) of IGST Act, 2017 and read as follows:
“Rule 9. The Place of provision of specified services: – The place of provision of following services shall be the location of the service provider:-
(a) Services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders.
(b) ….”
The Education Guide under the Service Tax Law clarified the scope of the term “account holder” and the services provided by banks to account holders as well as the services which are not provided to account holders as under;
“Question: 5.9.2 What is the meaning of “account holder “? Which accounts are not covered by this rule?
Answer: “Account” has been defined in the rules to mean an account which bears an interest to the depositor. Services provided to holders of demand deposits, term deposits, NRE (non-resident external) accounts and NRO (non-resident ordinary) accounts will be covered under this rule.
Question: 5.9.3 What are the services that are provided by a banking company to an account holder (holder of an account bearing interest to the depositor)?
Answer: Following are examples of services that are provided by a banking company or financial institution to an “account holder, in the ordinary course of business:-
(i) services linked to or requiring opening and operation of bank accounts such as lending, deposits, safe deposit locker etc;
(ii) transfer of money including telegraphic transfer, mail transfer, electronic transfer etc.
Question: 5.9.4 What are the services that are not provided by a banking company or financial institution to an account holder, in the ordinary course of business, and will consequently be covered under another Rule?
Answer: Following are examples of services that are generally NOT provided by a banking company or financial institution to an account holder (holder of a deposit account bearing interest), in the ordinary course of business:-
i) financial leasing services including equipment leasing and hire purchase;
ii) merchant banking services;
iii) Securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money changing;
iv) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services
In the case of any service which does not qualify as a service provided to an account holder, the place of provision will be determined under the default rule i.e. the Main Rule 3. Thus, it will be the location of the service receiver where it is known (ascertainable in the ordinary course of business), and the location of the service provider otherwise.”
Thus, as per the clarification given in Education Guide under the Service Tax Law, the custodial services are not covered under the service provided by banks to its account holders but are covered under the services which are not provided to account holders and accordingly, the place of supply of the custodial services by banks to FPIs have been treated as the location of the recipient as per the default rule, i.e., Rule 3 of the Place of Provision of Supply Rules, 2012.
Further, as per clarification given in FAQs on Banking, Insurance and Stockbrokers Sector (updated as on 27 December 2018) and Education Guide to Service Tax, it is clear that the custodial services provided by the banks/financial institutions to the FPIs cannot be considered as the services provided by the banks/financial institutions to account holders and thus, cannot be covered under Section 13(8)(a) of the IGST Act, 2017. The Place of Supply of such services is required to be determined under the default rule i.e., sub-section (2) of section 13 of the IGST Act, 2017.
The State GST officers are not familiar with services as the Service Tax was the subject matter of the central government. It is unlikely that the State GST officers aware about the clarification on the place of supply in case of custodial services provided by the bank is available in the Education Guide to Service Tax. Hence, a clarification in GST was required to avoid the different interpretations on this matter by the departments both Central and State.
GST Council, in its 53rd meeting recommended to the government to clarify the place of supply in case of custodial services provided by the Indian bank to PFIs to be the location of the recipient of supply. Accordingly, CBIC issued the Circular No 220/14/2024-GST, dated 26.04.2024 to clarify the same. Now the dust is settled with regard to place of supply in the case of custodial services provided to the PFIs by the Indian banks and Financial Institutions and has been clear that the place of supply shall be the location of the recipient.
Conclusion:
Where an issue is fairly clear based on the existing clarifications and also by way of clarifications in the earlier tax regime, judicial pronouncement etc, the department should follow such clarifications instead of forcing the taxpayers to go for litigation. The ease of doing business should not be merely an intent or on the papers of the government but should be in its action.
*****
Disclaimer: The views expressed herein are the views of the paper writer and cannot be used in framing of opinions or taking any decisions, actions without an independent evaluation-vasant.bhat@hnaindia.com.
Author Bio
