GST Notice issued to several banks on the Taxability of Custodial Services

The Maharashtra Goods and Services Tax (GST) Department has sent notices to a number of banks over the taxability of custodial services supplied to foreign portfolio investors (FPIs).

The state GST authorities have ruled that the custodial services offered by these SEBI-registered custodian banks do not qualify as zero-rated goods for export purposes.

The banks have now been hit with hundreds of crores of rupees in taxes and penalties.

Custodian services are used by FPIs investing in India. Banks consider this to be service export since they are providing services to FPIs situated outside of India and receiving fees in foreign currency.

“There is no GST applicable on invoice raised on FPI for custodial services provided the payment is received in foreign currency as a remittance and into the account of the service supplier, and not into the FPI account,” the custodian added.

According to the GST department, banks provide services to FPIs, who are essentially account holders. If a bank delivers services to an account holder, the place of supply is where the bank is located, which in this case is India, according to section 13(9) of the Integrated Goods and Services Tax (IGST) Act, 2017. As a result, the service provided by custodians does not qualify as an export.

The account, however, should be one that pays interest. Banks argue the department’s view is erroneous since the accounts in question must be interest bearing. Section 13 (9) is not relevant since FPIs generate interest on their accounts.

In accordance with Section 13(3) of the IGST Act, the place of supply is the site where the services are actually performed. The agency thinks that because the custodian handles FPI shares in India, their service is not exportable.

However, the section only applies to services provided in relation to commodities that must be physically available.

“Shares are not considered goods under GST. Except for shares, securities, and bonds, goods refers to any movable property. The goods must be physically delivered, but the shares are dematerialized. If shares are not goods, then 13(3) of IGST does not apply and the residual clause applies, which states that the location of supply shall be outside India,” according to a partner at a consulting firm.

The majority of custodian banks are based in Maharashtra. According to reports, they have now approached the Ministry of Finance to keep custodian services out of the GST.

SEBI said last year that GST will be charged on registration and yearly fees received by it from July 18, 2022. GST will also be levied on custodian fees based on the assets managed.

In India, around 11,000 FPIs are registered.