The Banking sector plays an important role in generating revenue in our
economy. It also plays an important role in the financial life of a business.
Although no wealth is created by banks and Financial Institutions, it helps in
the process of exchange and distribution of wealth. Any changes made in this
sector will bring corresponding changes in the development of business and
industries which are dependent on financial and non-financial services provided
by banking sectors.
One of the biggest transformations that the banking sector faced is after the
implementation of GST (Goods and Service Tax) in India.
GST is a new tax regime which was introduced in 2017. It is applicable across
India, which has replaced multiple taxes imposed by the central and the state
government on goods and services. Basically, it is a replacement to the Value
Added Tax (VAT) which was imposed on goods and services. The main objective of
the GST was to avoid the double taxation on goods and services.
Effect of GST on Banking Sector
Index Tax Credits (ITC) on Banking services
- No more centralized registration
Before GST, banks with pan-India operations could discharge their service
tax compliance through a single centralized registration. However, under GST,
such banks will have to register themselves separately for each state. This
puts an additional burden on the banks to comply with the filing of returns.
- Assessment and Adjudication became difficult
Under GST, the assessment has to be done by the respective state regulators
under which the concerned branch is registered. This means that more than
one adjudicating authority will be involved and there may be different
opinions on the same underlying issue. This contraction can prolong the
process of adjudication.
- Actionable Claims
Prior to GST, actionable claims were not included as a service under Service
Tax. However, Under GST actionable claims are included in the definition of
supply of goods.
- Place of Supply of Goods and Services
As per section 12(2) of the IGST Act, 2017, in the case of banking and other
financial services, the place of supply shall be the 'location of the
recipient of service' on the records of supplier of services. And if the
recipient's location is not available in the records of the supplier, then
the place of supply shall be the location of the supplier.
- Inter-branch GST implications
Prior to GST, banks were not subject to any tax for interstate transactions
between two branches of the same bank. However, under GST, the same is
levied on transactions between two interstate branches of a bank.
- Invoice requirements
As per rule 47 of the CGST Rules, 2017, the banking companies are required
to issue tax invoices to the customers within 45 days from the date of
supply of Banking services. However, Rule 54(2) of the CGST Rules, 2017
prescribes that such tax invoice can be replaced by any other document in
lieu of invoice, including consolidated statement, advice, invoice, etc
generated at the end of the month.
Under GST, a banking company or a financial institution engaged in the supply of
services through acceptance of deposits, granting loans or giving advances are
allowed to claim ITC under Section 17(4) of CGST Act, 2017.
ITC can be availed by the following methods:
As per rule 38 of CGST Rules, 2017, there are certain conditions for availing
ITC on banking services:
A banking or financial company may claim ITC only on:
- Reverse credits related to exempt services as provided under Section
17(2) of the CGST Act, 2017.
- Availing 50% of the eligible ITC on inputs, capital goods and input
services for the month, and the rest of the ITC will be lapsed.
- Taxes paid on inputs and input services which are used for business
- ITC cannot be claimed on account of supplies referred to in Section
17(5) of the CGST Act, 2017
The condition of 50% restriction on availing ITC is not applicable in case of
tax paid on supplies made by one registered person to another registered person
holding the same PAN, i.e., interstate transactions between branches of the same
50% of the balance amount of ITC is admissible and to be furnished in Form
GST is charged on all banking activities
Prior to GST, services offered by Banking companies were subject to 15% Service
Tax. However, under GST it has now risen to 18%. With the enhanced tax burdens,
the final customers of such Banking companies have to bear the additional
charges associated with Banking services such as:
Exemptions from GST:
Few banking services are exempted by the Central Government they are as follow:
- Transaction Charges
Transaction charges are the charges which we pay to the bank when we withdraw
cash from an ATM. it was increased to 18% from 15%. With respect to cheque book
services, the first 10 cheques will be free of cost in a financial year.
Thereafter, 18% taxes will be applied to each cheque.
Under GST, the loans are taxable at 18%. The home loans which were available to
the borrowers for a VAT of 5% for construction materials and 3.5% service tax,
are now available at 18% which will be little more expensive for the borrowers.
- Other services
Banking facilities like locker facilities, tax payment, billing, and shopping
etc. which are offered by the banking sector are taxable for 18% under GST which
is 3% higher than the early tax rates.
Impact on customer:
- Services provided by the Reserve Bank of India.
- Service of providing deposits, loans or advances where the consideration is in
the form of interest or discount, excluding interest involved in credit card
- Service of inter se sale or purchase of foreign currency amongst banks or
authorized dealers of foreign exchange, or amongst banks and such dealers.
- Service provided by a business facilitator or a business correspondent to a
Banking company or Insurance company for its accounts in a rural area branch.
- Services provided by a banking company to Basic Saving Bank Deposit under
Pradhan Mantri Jan Dhan Yojana.
- Services by the acquiring bank to any person for transfer of amount up to Rs.
2,000 in a single transaction done through credit card, debit card, or other
payment card service.
- Services under Atal Pension Yojana.
- Services under any Pension Scheme of State Governments.
- Services provided by Central Government, State Government or Union Territory for
any insurance for which total premium is paid by the Government.
- Under GST, the tax rate on each and every product and service of the banks have
become expensive and less affordable to the customers.
- The tax charged on Debit and Credit card is 18% which is costlier than the
previous rate which was 15%.
- Under GST, the rate of loans has been increased to 18% which puts the customers
in pressure and uncertainty whether the customer will be able to repay the
- The tax on investments like mutual funds are increased to 18% which is very much
higher for the customers to afford.
- Increase in the premium caused a large number of the customers to withdraw the
insurance policy. People with low income cannot afford the premium charged under
After the implementation of the GST in India, it was predicted that the Indian
economy would be transformed, as it aimed to help the firms to increase their
overall efficiency by simplifying the tax compliances.
However, the impact of GST is straightforward with a hike of 3% on Indirect Tax
imposed on Banking services. Banking companies also face the additional hurdle
of requiring to separately register in each state they operate in, which further
enhances their compliance load.
Thus, the GST on the Banking sector has not yet proven favourable to the Indian
economy or to their final customers. It is for the GST Council and the Central
Government to take into account the detrimental impact of such enhanced rates of
GST on the Indian economy at large.