SUPPLY BY BANKS UNDER GST

[Dr. Sanjiv Agarwal]

GST will be levied on supplies and not on sale or service. For the purpose of GST, supply shall include:

• all forms of supply of goods and/or services made or agreed to be made for a consideration by a person in the course or furtherance of business,
• Importation of service for a consideration, and
•  Services have been specified in schedule I, which shall be considered as a supply even if made without consideration.

The present taxable event under service tax is rendition of services which will no longer be relevant and only one event i.e., ‘supply’ will be relevant for charge of tax. Supply has been defined in an inclusive manner. Tax is on supply of service, therefore, even the supply, as prescribed in Schedule-I, made without consideration will be taxable. In the present scenario, the services provided without consideration i.e., free services are not taxable.

Transactions between banks / FI / NBFC and its agents would also be considered as supply and liable to GST. This would cover transactions with recovery agent, auctioneer etc.

Any lease, tenancy, license a letting out of land and building, transfer of business assets or their disposal, renting of immovable property temporary transfer of intellectual property rights, series in relation to information technology software and works contracts will be treated as supply of services.

Non-Performing Assets (NPAs) are common to banking industry and securitization of assets often resorted to. 'Service' does not include actionable claims but these (actionable claim) will be considered as goods in GST regime, as against present tax laws. If actionable claims are taxed for GST, it will be a major setback. Banks may seek exemption or a lower rate on the same.

Under the GST regime, financial leases would be considered as supply of goods and taxed to GST accordingly. However, other leases would be treated as services. Leased assets from outside India shall be subject to levy of IGST.

In case of repossession of assets by banks / FIs / NBFC's, same will be treated as supply of goods in term of Schedule-II to the model GST law (version-II). Accordingly, any transfer of the title in goods is supply of goods.

Where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person.

Where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless-

(i)       the business is transferred as a going concern to another person; or

(ii)      the business is carried on by a personal representative who is deemed to be a taxable person.

GST will be applicable on such transactions which will add to the cost of services. Presently, VAT is applicable but GST may be levied at a higher rate.

Many banks are also engaged in insurance business for which place of supply is crucial. Readers may refer to Chapter 5 for the detailed study on insurance services.

Since interest is a return on money lent to borrowers, it may continue to the out of GST net. Presently, leasing companies are burdened with both taxes- VAT as well as Service Tax. In GST regime, it is expected that such anomaly will go and there should not be dispute on the nature of transaction and it would be easier to decide as to when will a transaction in relation to transfer of right to use goods takes place in course of inter-state trade or commerce and where will be citus of transaction in case of transfer of right to use movable goods.

Time of Supply

The time of supply of services in case of banks and financial services shall be earlier of the following events:

• Date of issue of invoice or on the last date on which invoice is required to be issued.
• Date on which bank receives payment with respect to such supply.

As per place of supply provisions, if banks are required to pay tax on reverse charge basis, then time of supply shall be earlier of the following events:

• Date on which payment is made or
• Date immediately following sixty days from the date of issue of invoice by the bank / service provider

Place of Supply

As per section 9 of IGST law, the place of supply of banking and other financial services including stock broking services to any person shall be the location of the recipient of services on the records of the supplier, where the location of supplier of service and location of service recipient is in India.  However, if the location of the recipient of services is not on the records of the supplier, the place of supply shall be the location of the supplier of services.

Place of supply of services where the location of supplier (banking company) or location of the recipient is outside India, location of bank shall be the place of supply for:

(a)      services supplied by a banking company, or a financial institution, or a non-banking financial company, to account holders;

(b)      intermediary services.

The issue which arises here is determination of appropriate state which will pay the tax in case of massive volume of transactions or multiple state activities. The place of supply in such shall determine the state which will pay appropriate taxes or where services will be consumed. For example, in case of multi State-activities like lending, ATMs, credit cards, bank guarantees, forex etc., place of supply shall be location of the recipient of services i.e. customer’s address on the records of the bank.

In case of real time transactions like RTGS, NEFT etc. service tax is charged on transactions charges on transactions carried out under RTGS/NEFT facility under service tax regime. The issue here is levy of taxes on real time basis based on address is not possible. In present regime, service tax is charged from account of the customer affecting such RTGS or NEFT on real time basis. Under GST, place of supply provisions provides solution to this issue. It provides for levy of tax in the State in which registered address of customer is mentioned in records (i.e., KYC documents) of the bank. The GST shall be levied on real time basis as in the present regime.

Another issue for concern could be in case of multiple addresses for B2B transactions as to what shall be the place of supply. In such case,  definition of 'location of recipient of services' shall provide for address of the recipient which shall be as under:-

1. where a supply is received at a place of business for which registration has been obtained, the location of such place of business;
2. where a supply is received at a place other than the place of business for which registration has been obtained, that is to say, a fixed establishment elsewhere, the location of such fixed establishment;
3. where a supply is received at more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the receipt of the supply; and
4. in absence of such places, the location of the usual place of residence of the recipient;

In case of intermediary services like online banking services, de-mat services etc, place of supply shall be location of recipient of services.

Service providers may face challenges in respect of following :

• Location of service recipient in 'any where banking' setup
• 'Account' should also include credit cards / debit cards / borrowers etc.
• Banking and financial services have not been defined so far and as such its scope ought to be clarified as banks provide certain other management related services.
• Place of supply would be difficult to fix where a customer and/ or borrower is served from multiple locations but tagged to one home branch.

While GST is being claimed to the biggest reform in India, the banking and financial services need special provisions since they are very crucial to the economy as a whole.

Discussions to this article

[Ganeshan Kalyani]

Nice article sir. GST is going to gift so many challenges to the assesses. Indirect tax importance is going to increase. A dedicated team within organisation is going to be must under GST. As of now small company do not afford for a tax person on full time basis. But under GST the need would come for a company to appoint tax person to look after tax aspect within organisation. Thanks.