The banking sector is one of the largest services sectors and is the backbone of the country in India. Main implications for the Banking Sector to plan their GST implementation strategy are:
1. Substantial Increase in Compliance:
Currently most banks have ‘centralized’ registration under service tax or each branch is individually registered. Under the new tax regime banks would need to obtain State-wise registration in every State where they have a branch. In case a bank has multiple branches in one State, only one registration can be taken for all the branches in that State. State-wise registration will therefore lead to a substantial increase in compliance levels. Currently, a bank may be filing only two returns on an annual basis as a service tax assesse, but with GST, the bank will have to file a minimum of 37 returns per year for every State they are present in (three returns per month plus one annual return).
2. Determining Place of Supply Could be Critical
GST is a consumption based tax. Hence, for every transaction in GST, the bank will need to determine the place of consumption where GST will be paid. With bank branches conducting several transactions, both within and outside States, determining the place of supply will not be very easy.
The IGST Law casts the onus of determining whether a transaction is ‘intra-state’ or ‘inter-state’ on the assesse. So, banks will need to decide whether the payment is against Central GST (CGST) and State GST (SGST) or Integrated GST (IGST), based on the type of transaction.
In banking industry, it’s interesting to know the place of business as even though the person is having an account in a single location, he can do the transactions across globe through internet banking.
A Customer having an account in Mumbai may do the transaction from Delhi and can transfer money to persons from Chandigarh having account in Pune. 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.
3. Taxability of ‘Interest’
In the current tax regime, the service tax legislation does not tax ‘interest’. But with GST, the term ‘service’ is defined in a wide manner to cover ‘anything other than goods’ which may cover interest as well.
Governments across the world do not levy GST on interest given the fact that there is always a debate on whether interest is the time value of money or a consideration for lending money. The GST Law in India too should clarify if interest is outside the ambit of GST. If ‘interest’ is not expected to attract GST, it will have implications on input tax credits claimed by banks.
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 tedious task to collect GSTN of all customers, issue invoices for such small amounts and upload them on GSTN.
5. 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.
6. 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.
Written by Silky Gaba