Impact of GST on Banks and NBFC's - Issues and Challenges
28 Jan 2020
Financial service sector is the most flourishing sector managing the circulation of financial capital in the economy. Over years', the sector has witnessed considerable reforms where Goods & Services Tax is another yet impactful changeover to influence the working of the sector. The transition from earlier tax regime to GST regime was a troublesome affair. The financial companies or institutions, banks, non-banking financial companies experienced innumerable challenges in implementing GST provisions and are still toiling over considerable issues.
The existence of ambiguity in the GST provisions has opened up a way to considerable discussions and litigable matters. The said provisions entail lot of significant compliance requirements and multiple concerns influencing the nature of operations conducted under this sector.
Besides, the application of GST provisions on financial services sector has a conflicting upshot on the business structure where many benefits either are lost or lay unclear.
Based on our analysis, we have evaluated following impact on account of GST provisions on Banks & NBFC's:
● Accumulation of Input Tax Credit: As a prevalent practice, a financial company having more branches with same PAN incurs expenses centrally from its Head Office. Thus all invoices of expenses are directed at the head office. The head office also incurs some common expenses along with such centrally booked expenses. This results in accumulation of input tax credit at the head office. This amount of input tax credit remains unutilised leading to blockage of working capital as the major part of income of NBFCs are exempt from Goods & Services tax. Thus, input tax credit can never be fully utilised and shall always appear as accumulated in the financials of the companies.
● Implementation of Cross Charge or ISD Mechanism: The financial sector is facing a dilemma over implementation of ISD mechanism. Input Service distributor mechanism should be adopted where the financial services flow from head office to various branches. It's a mechanism where input tax credit related to input services could be distributed to the branches. The more beneficial allocation of input tax credit on common input expenses from head office to branches could only be done with the ISD mechanism. This will ensure effective utilisation of working capital which gets blocked due to accumulation of credit as discussed in point above. The frequently asked questions issued concerning this sector clarifies that the distribution of input tax credit through ISD registration shall be mandatory where Input Tax Credit (ITC) is available to a GST registrant though the services procured from third party vendor are also directly used by various 'distinct persons.
However, ISD mechanism is applicable only for distribution of input services and not goods. Also, it is quite inflexible and increases the compliance burden of the tax payer.
Cross charge is a flexible and favourable option in case of supplies between distinct persons and also the only method for distribution of input tax credits in case of goods. For instance, ABC Ltd has its Head office at Delhi and branches at Mumbai and Chennai. The common expenses availed at head office shall also be used at branches. Hence, the value of such common expenses shall be required to be cross charged for the purpose of apportioning the amount of expense.
Although, the cross charge method is being followed for distribution of common transactions between the branches over ISD mechanism. There is an uncertainty on which option shall be more useful for the NBFCs for availing full benefit of input tax credit.
For distribution of common expenses, either ISD or cross-charge option could be opted. For dealers having multiple state presences, we suggest that simultaneous use of the ISD mechanism and cross charge mechanism should be adopted for efficient utilisation of input tax credit.
● Only 50% of ITC in case of capital goods: It is mandatory to reverse 50% of the input tax credit available against capital goods along with inputs and input services. This provision under GST regime has led to loss of 50% of input tax credit. Where earlier, there was no condition of reversal of CENVAT credit in case of capital goods, thus, input credit was not lost.
● Separate Registration for every Branch: Earlier, financial service companies having operations across India could discharge their service tax compliances through single registration. But under current GST structure, separate registration for each and every state is mandatory where different branch is located. This has raised the compliance burden and the follow up process with mandatory compliance requirements.
● Arduous assessment or adjudication process: Where more branches are concerned, reasonable explanation is required to be made for chargeability and utilisation of input tax credit in different states. Thus, the assessment process shall involve more than one assessing authority for a similar issue making it more tedious.
● What comes under 'Supply' bracket?
Since the enactment of Goods & Services Tax Act, there is uncertainty in case of provision of financial services provided by the financial service sector. There are some services where whether the service shall be covered under supply or not is unclear and dubious.
Though various issues have been clarified in the frequently asked questions issued by CBIC, still lot of litigable cases are expected to follow in near future.
In the case of Bajaj Finance Limited, there was an argument whether the consideration of bounce charges should be treated as supply or not under the GST regime. The Advance Ruling Authority of Maharashtra ruled that the receipt of bounce charges by the applicant would be receipt of amounts for tolerating the act of its customer for having bounced the cheque or any other mode of payment. Thus, it construes as supply as per Sr. No 5(e) of Schedule II of the CGST Act.
Moreover, in another case of the same applicant concerning collection of penal interest, similar ruling was announced. It was observed that the receipt of penal charges on delayed payment of EMIs would be receipt of amounts for tolerating the act of its customer for having defaulted on their EMI payments within due dates. Hence, the activity of collecting penal interest by the applicant would amount to a taxable supply under the GST regime.
Furthermore, inter-state transactions of supply of goods or services between two branches shall come under GST bracket. This shall raise an issue on the applicability of GST where transactions are done without consideration. Although, section 7 of the CGST Act, 2017 read with Schedule I provides that services supplied without consideration to related persons or distinct persons only would qualify as 'supply'. Therefore, the services supplied by a supplier without consideration to an unrelated recipient or a person other than related or distinct person, shall not amount to supply and thus not liable to GST.
Similar issue was argued in the case of M/s Columbia Asia Hospitals Pvt. Ltd, where the advance ruling authority ruled that the activities performed at the corporate office in the course of employment such as accounting, other administrative and IT system maintenance for the units located in other states shall be constituted as services to distinct persons and thus shall be treated as supply.
● Argument over 'Place of Supply'
The location of the service receiver is to be treated as the place of provision of services where accounts are linked with the financial services. And, where the services are not linked, the location of service provider shall be the place of supply.
However, in this digitised environment where the customers are located at multiple locations determining the location of the service recipient shall be quite demanding. Though as per the provisions of the act, the location of the recipient in case of more than one establishment, the establishment most directly concerned shall be considered. This also brings in another issue of how directly concerned establishment shall be decided.
Moreover, in the case of intermediary services provided, the provision of place of supply under the GST law does not provide clear clarification. An incorrect consideration of inter-state supply as intra state supply is another issue over which indecisions may arise.
The financial service sector has a long road ahead in proper follow up of the provisions under the GST regime. Although a lot of clarifications for banks, Insurance sector and stock brokers have been issued via frequently asked questions by the government but clarifications are still unresolved in the case of non-banking financial companies.
The financial services sector is required to plan its financial anatomy with just management and cautious compliance follow up under GST framework. Thus, getting most out of the benefits bestowed in the provisions of the GST act.
About the Authors:
CA Inder Pal Singh Pasricha, Partner, I.P. Pasricha & Co
Inderpal Singh is a member of the Institute of Chartered Accountants of India. He is a senior partner in I.P. Pasricha & Co. He is a stalwart in the profession with over 40 years of experience. He has vast experience in the field of Indirect and Direct Taxation.
CA Maneet Pal, Partner, I.P. Pasricha & Co
Maneet Pal Singh is a member of the Institute of Chartered Accountants of India. He is a partner in I. P. Pasricha & Co., New Delhi. He has experience in the field of Indirect and Direct Taxation. He has extensive experience in advising clients across a range of industries.
Disclaimer: The views expressed in this article are personal. The publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.
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