Article on Banking Sector- GST Implications

Banking Sector- GST Implications

The Banking Sector including NBFC plays an important role in economic development of the country. The Goods and Services Tax (GST) has specific implications for the banking and financial services sector. In this article we will discuss the GST provisions which are applicable for banking sectors, exemptions available for certain services provided by banks, RCM & Place supply provisions applicable on banking services.

1. Exemption from E-invoice and QR Code:
In terms of Notification No. 13/2020-Central Tax dated 21st March, 2020, certain entities/sectors have been exempted from mandatory generation of e-invoices as per subrule (4) of rule 48 of CGST
Rules 2017. The insurance or banking or financial institution, including NBFCs are covered under those entities which are not required to generate e-invoices.

Similarly, as per Notification No. 14/2020 Central Tax dated 21st March, 2020, certain entities are exempted from mentioning of Dynamic Quick Response (QR) code on the invoice issued in respect of B2C supplies. The insurance or banking or financial institution, including NBFCs are covered under those entities which are not required to mention the Dynamic Quick Response (QR) code on the invoices issued in respect of B2C supplies.

Further, vide para 2 of serial no 3 of circular no 186/18/2022 it was clarified that the said exemption from generation of e-invoice is for the entity as a whole and is not restricted by the nature of supply being made by the said entity.

For example A Banking Company providing banking services, may also be involved in making supply of some goods, including bullion. The said banking company is exempted from mandatory issuance of e-invoice in terms of Notification No. 13/2020-Central Tax, dated 21st March, 2020, as amended, for all supplies of goods and services and thus, will not be required to issue e-invoice with respect to any supply made by it.

2. Exemption of Certain Services:
Under GST, certain services provided by banks and financial institutions are exempt from tax. The details of said services are as follows;

Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services).
The purchase and sale of foreign currency, whether in the form of cash or in any other form, are exempt from GST.
Services provided by a banking company to Basic Saving Bank Deposit (BSBD) account holders under Pradhan Mantri Jan Dhan Yojana (PMJDY).
Services by an acquiring bank, to any person in relation to settlement of an amount upto Rs. 2,000/- in a single transaction transacted through credit card, debit card, charge card or other payment card service.

3. Reverse Charge Mechanism (RCM):
Certain services provided to banks may attract the Reverse Charge Mechanism (RCM) under GST. Under RCM, the recipient of the service (in this case, the bank) is responsible for paying the tax rather than the service provider. The services on which banking company is liable to pay tax under RCM are as follows;

Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company.
Supply of services by the members of Overseeing Committee to Reserve Bank of India.
Services supplied by individual Direct Selling Agents (DSAs) other than a body corporate, partnership or limited liability partnership firm to bank or non-banking financial company (NBFCs).
Services provided by business facilitator (BF) to a banking company

4. Time limit for issuing tax invoice by Banks, Financial Institutions;
As per Rule 47 of CGST Rules 2017, in case of the taxable supply of services the tax invoice should be issued within a period of 30 days from the date of the supply of service.

However as per the first proviso to rule 47, where the supplier of services is an insurer or a banking company or a financial institution, including NBFC, the period within which the invoice or any document in lieu thereof is to be issued shall be 45 days from the date of the supply of service.

5. Place of Supply of banking services:
Section 12 of IGST Act 2017 contains the provisions in respect of the Place of supply of services where location of supplier and recipient is in India and Section 13 of IGST Act 2017 is used to determine the Place of supply of services where location of supplier or location of recipient is outside India

As per section 12 (12) of IGST Act, 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 of services.

However, Section 13 (8)(a) of IGST Act states that the place of supply of the service supplied by a banking company, or a financial institution, or a non-banking financial company, to account holders, shall be the location of the supplier of services.

6. Input Tax Credit:
With respect to the claim of ITC the banking company has two options. The Option once exercised can not be withdrawn during the financial year.

Option: 1
Proportionate ITC as per section 17(2):
Section 17(2) of the CGST Act stipulates that, where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the IGST Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

Option: 2 (50% ITC):
Avail 50% of the eligible ITC on inputs, capital goods and input services in that month and the rest shall lapse and accordingly follow the following procedure in accordance with Rule 38 of the CGST Rules:
(a) the said banking company or institution shall not avail the credit of,-

(i) the tax paid on inputs and input services that are used for non-business purposes; and

(ii) the credit attributable to the supplies specified in sub-section (5) of section 17, ;

(b) the said company or institution shall avail the credit of tax paid on inputs and input services referred to in the second proviso to sub-section (4) of section 17 and not covered under clause (a)

(c) fifty per cent. of the remaining amount of input tax shall be the input tax credit admissible to the company or the institution and the balance amount of input tax credit shall be reversed in FORM GSTR-3B.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.