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GST and its impact on Banks and Financial Services

Jan 02, 2017

The GST will replace atleast 17 central and state taxes to make way for a single, unified taxation system and will impact almost all industries. The GST will introduce areas that will benefit the customers, whereas there will also be areas where the consumers may have to shell out more. The banking and financial sector is one such area that is being predicted to get a little more expensive for the consumers compared to what it is today after the implementation of GST. GST for banks and financial services will require a shift from centralized compliance to state-based compliance and will have a noteworthy impact on financial products and IT systems.

Read: GST Impact on Ordinary Consumer

Tax Rate

Currently banking and financial services are taxed a service tax of 15 percent. The GST is being speculated to have tax rates between 18 to 20 percent. This implies that banking and financial services are set to become expensive for the consumers. Apart from the taxes, there will also be regulatory compliances that banks and consumers are expected to follow under GST. Since IGST will be divided into CGST and SGST, there will be different sets of GST compliance processes that need to be abided by.

Read: What is CGST, SGT and IGST?

Also, there are several banking activities that are currently exempt from service tax, e.g. Fund-based activities like interest to be paid on deposits or savings accounts, and loans disbursed. These services might incur GST unless exclusively mentioned otherwise.

Collateralised Borrowing and Lending Obligation (CBLO)

CBLO is a RBI backed obligation between a borrower and lender that defines the terms and conditions of a loan. Currently, the fee, discount or the interest on CBLO is exempt from service tax. As of now, service tax for financial services is imposed on fee-based activities like processing fee and transaction fee. However, revenue from income-based activities like interest, investment, propriety trading etc. is excluded from the tax ambit.

With the GST coming into picture, the government should make provisions for clear demarcations between fee-based and fund-based transactions. If this demarcation is not made and if fund-based transactions are not exclusively exempted, revenue earned from instruments like the CBLO will also come under the blanket of GST and the GST tax rate is expected to be higher than the current one.

Read: Service Tax on Banking and Financial Services

Finance Lease

Under the current system of taxation, both VAT and service tax is applicable on finance lease transactions. Even non-financed lease transactions are subject to VAT. However, import of assets on lease basis does not attract VAT. With the GST law, a finance lease will be treated as the supply of goods, whereas an operating lease, as a service. Both will thus be subjected to GST. Additionally, the leasing of an asset out of India, will also come under the GST.

Business Process Change

Over the last decade, customers are used to utilizing banking services anytime and anywhere. Even while travelling a customer may access his account or use his card anywhere in the world. Under the GST, defining the location of service supply is a subject of cardinal importance. Therefore for abiding to the GST norms, a bank that has presence in only 15 states will need registration for the rest of the states and union territories.

Similarly for loans, under normal circumstances, initial customer verification is done by local agencies, loan processing is done centrally, disbursement locally, and repayment by bank transfers/ECS is mandate. With GST, determining the point of supply for each of the processes will become extremely cumbersome.

Read: Loan Evaluation Process in India

Some bank services to a customer are centralized (Demat Account, Wealth Management) whereas some others are localized (Savings Account, Personal Loan). Since GST is a destination-based tax, these services will call for additional compliance formalities and may increase the compliance costs courtesy multiple levels of assessments and audits under the proposed GST structure.

To Conclude

The introduction of the GST model is a significant development that is set to transform how the Indian taxation system works. However, considerable work needs to be done and the implication of GST for banks and financial services needs to be understood. The government should also ensure the GST legislation addresses the complete concerns of banks and financial services so that the GST reform turns into a success for everyone involved.

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