GST in Banking sector and GST on Forex

Introduction:

Banking is an integral part of the financial system and also the backbone of global economies. The banking industry provides a wide range of services to its clientele. Majority of the services rendered by Banks fall under the purview of GST.

Background:

In India, Banks are governed by various statutes, some of which are-

1. Companies Act, 2013
2. Reserve Bank of India Act, 1934
3. Banking Regulation Act, 1949
4. Prevention of Money Laundering Act, 2022
5. Information Technology Act, 2000
6. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2022.

vGoods and Services Tax Act, 2017.

This module helps you to understand the impact of GST on the Banking Industry and Forex dealers.

Let’s get started!!!

GST on Forex dealers:

The Foreign Exchange Dealer Association of India (FEDAI) is an association of banks dealing in foreign exchange in India (typically called Authorised Dealers- AD’s). As of June 2022, there are 94 Banks (which include public sector, private sector, co-operative and foreign banks)

Forex trading involves the buying and selling of currencies. Authorised forex dealers facilitate the trading of currencies for retail clients and/or businesses.

The taxable event under GST is ‘Supply’. GST is levied on the supplies of ‘Goods’ or ‘Services’ or both. Now, the moot question arises, as to whether the forex trading is considered as a ‘Supply’ of ‘Goods’ or ‘Services’.

Method II- Based on the slab rates:

Note: Provided also that a person supplying the services may exercise the option to ascertain the value in terms of method-II, for a financial year and such option shall not be withdrawn during the remaining part of that financial year.

From the afore-discussed illustration and methodologies, it can be inferred that Method-II (i.e., based on slabs) of valuation of supply for the purpose of levying GST @18% would be suggestable for the Authorised dealers or money changers, as the value of supply and GST amount would be less.

GST on the Banking sector

Banks offer a wide variety of products (i.e., financial services) to their wide variety of clientele. W.e.f. 01st July 2017 GST is levied on the financial services rendered by Banks and thereby, the provisions of GST are equally applicable to Banks, just like any other business in the land of India.

However, there are certain specific provisions which are applicable exclusively to Banks, Financial Institutions, NBFC and Insurance companies.

Through this module, the author wishes to emphasize on few of the special provisions which are applicable to ‘Banks’.

1. Levy and collection.
2. Registration.
3. Invoicing.
4. Input Tax Credit (ITC).
5. E-way bill.

Taxability of the financial services:

The main source of income for Banks ‘Interest’ from lending loans. Now, the question arises as to whether the ‘Interest’ income earned by Banks is taxable under GST?

Thereby, it can be understood that the ‘Interest’ income earned by Banks from credit card services is taxable @18% and exemption for the same is not available.

Reverse charge mechanism:

In normal cases, GST is paid by the supplier of goods or services, however, there are certain instances, in which GST is paid by the recipient of goods or services.

Here is the list of services as provided under Notification 13/2017-CT(Rate), under which Banks are required to pay GST under RCM, as a recipient of service.

1. Services supplied by a recovery agent [Entry-8]
2. Services supplied by Individual direct selling agents (DSA’s) other than a body corporate, partnership, or limited liability partnership firm. [Entry-11]
3. Services provided by business facilitator [Entry-12]

Registration:

The provisions relating to ‘Registration’ are provided under Sec 22 to 30 of CGST Act. It can be understood that as the Banks are engaged in rendering services the threshold limit to take registration would be Rs. 20 lakhs (Rs. 10 lakhs in the case of special category states like Nagaland, Manipur, Tripura, Mizoram).

Invoicing under GST:

The provisions relating to ‘Invoicing’ is provided under Sec 31 of CGST Act 2017. The gist of the same is discussed as follows;

Note:

1. For the exempted supply of services, Banks shall issue ‘Bill of supply’
2. If the value of supply is less than Rs. 200, then Banks need not issue Tax invoice or Bill of supply, if all the following conditions are also satisfied.
   • The recipient is an unregistered person.
   • The recipient does not require such invoice or bill of supply.

E-invoicing:

In terms of Rule 48(4) of CGST Rules 2017, the registered person whose aggregate turnover in any previous financial year from 2017-18 exceeds the specified threshold, shall issue E-invoice with QR code having the embedded Invoice Reference Number (IRN) for B2B supplies and exports.

However, the same is not applicable to certain category of ‘Service providers’ as enumerated under Rule 54 in light of Notification 13/2020-Central Tax dated 21st March 2020.

Thereby, Banks, Financial institutions, Insurance companies and NBFCs are not required to issue E-invoice having QR codes with embedded IRN, for B2B supplies.

Certain issues relating to “Tax invoice’ are clarified through FAQs, the same are discussed below;

Input Tax Credit:

The provisions relating to Input Tax Credit are provided under Sec 16 to 21 of CGST Act. The main objective of implementing GST is to remove cascading effect of taxes and allow seamless flow of credits. However, this will not hold good for Banks in light of certain provisions provided under Sec 17 of CGST Act.

GST law provides two options to Banks for availing and reversing the Input Tax Credit under GST.

The basic conditions as laid down under 16 of CGST Act shall be satisfied by the Banks for availing the ITC and on satisfaction of the same it would be treated as eligible credits. However, there are certain credits which are blocked under Sec 17(5), on which ITC is not available and thereby, they are termed as ‘Ineligible credits’

Option 1: General rule (i.e., Rule 42/43 reversals)

In terms of Sec 17(2) of CGST Act, where the goods or services are used by the registered person (i.e., Banks) partly for effecting

• taxable supplies (including zero-rated supplies) and
• exempt supplies

then the amount of credit is restricted only towards the input tax attributable to taxable supplies.

Meaning thereby, ITC attributable to exempt supplies shall be reversed in compliance with the Rule 42 and 43 of the CGST Rules 2017. Since banks has both taxable and exempt supplies on the outward leg, they would be entitled to avail the ITC as derived from the aforesaid rules.

Example:

Option 2: 50% credit rule

Banks has an option not to calculate the eligible ITC to be availed under Rule 42 and 43 and directly they can avail 50% of the eligible ITC and the other 50% ITC would lapse, these shall be done on a monthly basis.

Once the 50% rule is adopted by the Banks, they can not shift to the other option within the same financial year. However, they can opt for the other option in the next financial year.

This rule is not applicable on the invoices received from distinct persons, in terms of the second proviso to Sec 17(4) of CGST Act 2017.

Note:

Whether one Bank registered in the state of Karnataka can opt for 50% rule and its branch in Kerala opt for general rule?

Well!! The answer is ‘Yes’, as the persons who have taken GST registration would be treated as distinct for the purposes of GST even if they are registered under the same PAN and Sec 17(4) is applicable qua each registration and not for the bank as a whole.

E-way bill:

The provisions relating to Electronic Way bill (hereinafter referred to as ‘E-way bill’) are provided under Rule 138 of CGST Rules 2017.

GST in Banking sector and GST on Forex

Introduction:

Banking is an integral part of the financial system and also the backbone of global economies. The banking industry provides a wide range of services to its clientele. Majority of the services rendered by Banks fall under the purview of GST.

Background:

In India, Banks are governed by various statutes, some of which are-

1. Companies Act, 2013
2. Reserve Bank of India Act, 1934
3. Banking Regulation Act, 1949
4. Prevention of Money Laundering Act, 2022
5. Information Technology Act, 2000
6. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2022.

vGoods and Services Tax Act, 2017.

This module helps you to understand the impact of GST on the Banking Industry and Forex dealers.

Let’s get started!!!

GST on Forex dealers:

The Foreign Exchange Dealer Association of India (FEDAI) is an association of banks dealing in foreign exchange in India (typically called Authorised Dealers- AD’s). As of June 2022, there are 94 Banks (which include public sector, private sector, co-operative and foreign banks)

Forex trading involves the buying and selling of currencies. Authorised forex dealers facilitate the trading of currencies for retail clients and/or businesses.

The taxable event under GST is ‘Supply’. GST is levied on the supplies of ‘Goods’ or ‘Services’ or both. Now, the moot question arises, as to whether the forex trading is considered as a ‘Supply’ of ‘Goods’ or ‘Services’.

Method II- Based on the slab rates:

Note: Provided also that a person supplying the services may exercise the option to ascertain the value in terms of method-II, for a financial year and such option shall not be withdrawn during the remaining part of that financial year.

From the afore-discussed illustration and methodologies, it can be inferred that Method-II (i.e., based on slabs) of valuation of supply for the purpose of levying GST @18% would be suggestable for the Authorised dealers or money changers, as the value of supply and GST amount would be less.

GST on the Banking sector

Banks offer a wide variety of products (i.e., financial services) to their wide variety of clientele. W.e.f. 01st July 2017 GST is levied on the financial services rendered by Banks and thereby, the provisions of GST are equally applicable to Banks, just like any other business in the land of India.

However, there are certain specific provisions which are applicable exclusively to Banks, Financial Institutions, NBFC and Insurance companies.

Through this module, the author wishes to emphasize on few of the special provisions which are applicable to ‘Banks’.

1. Levy and collection.
2. Registration.
3. Invoicing.
4. Input Tax Credit (ITC).
5. E-way bill.

Taxability of the financial services:

The main source of income for Banks ‘Interest’ from lending loans. Now, the question arises as to whether the ‘Interest’ income earned by Banks is taxable under GST?

Thereby, it can be understood that the ‘Interest’ income earned by Banks from credit card services is taxable @18% and exemption for the same is not available.

Reverse charge mechanism:

In normal cases, GST is paid by the supplier of goods or services, however, there are certain instances, in which GST is paid by the recipient of goods or services.

Here is the list of services as provided under Notification 13/2017-CT(Rate), under which Banks are required to pay GST under RCM, as a recipient of service.

1. Services supplied by a recovery agent [Entry-8]
2. Services supplied by Individual direct selling agents (DSA’s) other than a body corporate, partnership, or limited liability partnership firm. [Entry-11]
3. Services provided by business facilitator [Entry-12]

Registration:

The provisions relating to ‘Registration’ are provided under Sec 22 to 30 of CGST Act. It can be understood that as the Banks are engaged in rendering services the threshold limit to take registration would be Rs. 20 lakhs (Rs. 10 lakhs in the case of special category states like Nagaland, Manipur, Tripura, Mizoram).

Invoicing under GST:

The provisions relating to ‘Invoicing’ is provided under Sec 31 of CGST Act 2017. The gist of the same is discussed as follows;

Note:

1. For the exempted supply of services, Banks shall issue ‘Bill of supply’
2. If the value of supply is less than Rs. 200, then Banks need not issue Tax invoice or Bill of supply, if all the following conditions are also satisfied.
   • The recipient is an unregistered person.
   • The recipient does not require such invoice or bill of supply.

E-invoicing:

In terms of Rule 48(4) of CGST Rules 2017, the registered person whose aggregate turnover in any previous financial year from 2017-18 exceeds the specified threshold, shall issue E-invoice with QR code having the embedded Invoice Reference Number (IRN) for B2B supplies and exports.

However, the same is not applicable to certain category of ‘Service providers’ as enumerated under Rule 54 in light of Notification 13/2020-Central Tax dated 21st March 2020.

Thereby, Banks, Financial institutions, Insurance companies and NBFCs are not required to issue E-invoice having QR codes with embedded IRN, for B2B supplies.

Certain issues relating to “Tax invoice’ are clarified through FAQs, the same are discussed below;

Input Tax Credit:

The provisions relating to Input Tax Credit are provided under Sec 16 to 21 of CGST Act. The main objective of implementing GST is to remove cascading effect of taxes and allow seamless flow of credits. However, this will not hold good for Banks in light of certain provisions provided under Sec 17 of CGST Act.

GST law provides two options to Banks for availing and reversing the Input Tax Credit under GST.

The basic conditions as laid down under 16 of CGST Act shall be satisfied by the Banks for availing the ITC and on satisfaction of the same it would be treated as eligible credits. However, there are certain credits which are blocked under Sec 17(5), on which ITC is not available and thereby, they are termed as ‘Ineligible credits’

Option 1: General rule (i.e., Rule 42/43 reversals)

In terms of Sec 17(2) of CGST Act, where the goods or services are used by the registered person (i.e., Banks) partly for effecting

• taxable supplies (including zero-rated supplies) and
• exempt supplies

then the amount of credit is restricted only towards the input tax attributable to taxable supplies.

Meaning thereby, ITC attributable to exempt supplies shall be reversed in compliance with the Rule 42 and 43 of the CGST Rules 2017. Since banks has both taxable and exempt supplies on the outward leg, they would be entitled to avail the ITC as derived from the aforesaid rules.

Example:

Option 2: 50% credit rule

Banks has an option not to calculate the eligible ITC to be availed under Rule 42 and 43 and directly they can avail 50% of the eligible ITC and the other 50% ITC would lapse, these shall be done on a monthly basis.

Once the 50% rule is adopted by the Banks, they can not shift to the other option within the same financial year. However, they can opt for the other option in the next financial year.

This rule is not applicable on the invoices received from distinct persons, in terms of the second proviso to Sec 17(4) of CGST Act 2017.

Note:

Whether one Bank registered in the state of Karnataka can opt for 50% rule and its branch in Kerala opt for general rule?

Well!! The answer is ‘Yes’, as the persons who have taken GST registration would be treated as distinct for the purposes of GST even if they are registered under the same PAN and Sec 17(4) is applicable qua each registration and not for the bank as a whole.

E-way bill:

The provisions relating to Electronic Way bill (hereinafter referred to as ‘E-way bill’) are provided under Rule 138 of CGST Rules 2017.