ICAI Releases Handbook for GST compliances in Banking Sector [Download HandBook]

The Institute of Chartered Accountants of India (ICAI) has released Handbook for GST compliances in Banking Sector.

The banking industry plays a key role in the world’s economy by offering various financial services to the stakeholders of the society. Banks do various tasks like taking in money deposits, giving loans, handling payments, managing investments and many more. Additionally, new technologies have greatly changed the way banks operate, making their services more efficient and accessible. The banking industry is heavily regulated to ensure stability, protect consumers, and prevent financial crimes.

To conduct efficient bank audits, members must have up-to-date knowledge of GST regulations, specifically those affecting banks.

Keeping in view this requirement of the members and in furtherance of its objective of dissemination of knowledge and awareness through technical publications, newsletters, E-learning and organizing various programmes, Certificate courses, webcasts etc. for all stakeholders, the GST & Indirect Taxes Committee of Institute of Chartered Accountants of India (ICAI) has come out with February, 2024 version of its publication titled ‘Compliances of GST in Banking Sector’.

The publication contains a comprehensive list of all provisions that may be relevant to the banking industry.

Banking Sector – An Overview

Service Tax Applicability on Banks

Service Tax was introduced in India on 01.07.1994. However, Banking and Other Financial Services had been brought within the ambit of Service Tax w.e.f. 16.07.2001.

Services mentioned in section 65(12)(a) of the Finance Act, 1994 were made taxable, if provided by:

(a) Banking company and financial institution including NBFCs from July 16, 2001; or

(b) Any other body corporate from August 16, 2002; or

(c) Any other commercial concern from September 10, 2004.

Services mentioned in section 65(12)(b) of the Finance Act, 1994 are taxable, if provided by:

(a) Banking companies, financial institutions including NBFCs and other body corporates from July 1, 2003; or

(b) Commercial Concerns from September 10, 2004.

Further, with effect from May 16,2008, section 65(12) has been amended to levy service tax on foreign exchange broking and purchase or sale of foreign currency, including money changing, provided by a foreign exchange broker or an authorised dealer in foreign exchange or an authorised money changer also.

Banking Services under Negative List of Services w.e.f. July 1, 2012

After the introduction of Negative List i.e. with effect from July 1, 2012, Service Tax was applicable on all services provided by banks except followings:

• Services by the Reserve Bank of India;
• Services by way of—
  • extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount;
  • inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers.

Banking Services under GST w.e.f. July 1, 2017

In the GST regime, there is no concept of a Negative List and the taxable event s supply of goods or services or both. In the case of banking services also, GST is applicable on the supply of services unless such services are exempted by way of notification or the same are classified as non-GST supplies. Additionally, the following activities shall be treated as supply even if made without consideration as specified in Schedule I of the Central Goods and Services Act, 2017 (“the CGST Act”) and are subject to tax, which is a paradigm shift from the earlier regime:

• Permanent transfer or disposal of business assets where input tax credit (“ITC”) has been availed on such assets.
• Inter Unit Supply: Supply of goods/ services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business.

This clause encompasses within its purview, any supply of goods or services or both between:

– different branches of the bank having separate GST registration; or

– between the head office and different branches of the bank having separate GST registration, irrespective of the fact that there is no consideration for such services between the supplier and the recepient.

As a result, it is critical to identify transactions that may fall under the deeming provisions of Schedule I and be subject to taxation. The taxable value of such transactions shall be established in accordance with section 15 and rule 28 of the Central Goods and Services Rules, 2017 (“the CGST Rules”).

Furthermore, Circular No. 199/11/2023 – GST, dated July 17, 2023, must be consulted before concluding on the taxability of presumed transactions between distinct persons, i.e. individuals with numerous GST registrations within one State or Union territory or across many States or Union territories.

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