On Saturday, in a welcome move, the Central Board of Indirect Taxes and Customs (CBIC) came out with a 32-page document covering frequently asked questions (FAQs) on the applicability of the Goods and Services Tax (GST) on the banking sector, the insurance sector as well as stock broking services.
In April, plenty of brouhaha ensued when banks were slapped with a service tax notice for non-payment of service tax - plus interest and penalty - on some of the free services extended to their customers. So the Department of Financial Services had subsequently approached its revenue counterpart to clear the confusion on the topic, and the recently-released FAQ does just that.
"Section 7 of the CGST Act, 2017 read with Schedule I thereto provides that services supplied without consideration to related persons or distinct persons only would qualify as 'supply'. Also import of services by bank from a related person or from any of its establishments outside India in the course or furtherance of business will be supply even if imported without consideration. Therefore, where the services are supplied by a supplier without consideration to an unrelated recipient or a person other than a related or distinct person, the same would not amount to supply and not liable to GST," read the document.
The FAQ hence made it clear that free services, like ATM withdrawals and cheque book issuance, provided by banks to customers will not attract GST. It added that the CGST Act, 2017 specifically excludes money and securities. The former, as defined in the Act, includes instruments like cheques, drafts, pay orders, promissory notes, letters of credit, et al. "Therefore, activities that are only transactions in such instruments would be outside the definition of service. This would include transactions in Commercial Paper and Certificate of Deposit (as they are in the nature of promissory notes), issuance of drafts or letters of credit, etc," it explained.
However, any "related activity" for which a separate consideration is charged would come under GST's ambit "if other elements of taxability" are present. So, for example, GST would be levied on any service charge tacked on for making drafts. Significantly, any additional interest slapped on customers for defaulting in repaying loan instalments will be liable to GST. The same is true for charges imposed on late payment of credit card dues. "Services provided by banks to RBI would be taxable as these are not covered by any of the exemptions or excluded from the purview of GST under the CGST Act, 2017 or under the IGST Act, 2017," it added. The FAQ further explained finance lease as a method of borrowing against the asset and made it clear that "interest on finance lease transactions will be taxable under GST".
Pratik Jain, PwC Partner & Leader, Indirect Tax, said that the FAQs are very significant as globally the financial service sector is considered as most complex from GST standpoint. "Transactions relating to securitisation, derivatives, future and forward contracts have been clarified to be exempt from GST, which have been debated since introduction of GST. While few aspects such as taxability of transactions between Indian and overseas offices of same bank still need some more clarity, industry would welcome the government's initiative," said Jain.
The FAQ section on the insurance sector made clear that "The service of re-insurance falls within the scope of supply, and is chargeable to GST." The purchase of insurance policies by NRIs, where the premium is paid through the Non-Resident External Bank account, will also attract GST. That is because the amounts from such accounts are paid in Indian Rupees and "are not received in convertible foreign exchange", hence life insurance services here are treated as "inter-State supplies and subject to GST".
On whether GST will be levied on the exit-load of mutual funds, the department said exit load in the form of a fee (whether or not as a fixed percentage of the investment) is liable to GST. "Even if the exit load is in the form of units in the fund, it may be concluded that the consideration received in money was later converted to NAV units," it added.
The FAQ also made it clear that brokerage earned in stock broking service is liable to GST. Moreover, any interest/ delayed payment charges charged for delay in payment of brokerage amount/settlement obligations/margin trading facility shall also come under the GST ambit.
While the document is certainly very comprehensive, CBIC could do more to introduce transparency and clarity. According to Jain, further clarifications around services provided by multiple branches and to multiple locations of customers would provide much-needed certainty to the industry and reduce possibility of litigation.
With PTI inputs
Copyright©2021 Living Media India Limited. For reprint rights: Syndications Today