Impact of GST on the Banking Sector Impact of GST on the Banking Sector

Goods and Services Tax (GST) regime was rolled out in India on 1st July 2017, and since then every sector and industry saw its effect in varying proportions. However, the impact of GST on the banking sector is high and in a way, the functioning of banks is affected the most.

Amongst all the sectors under GST, the financial industry is one of the major sectors. So, forming a structure to keep up with GST changes is a necessity for banks and NBFCs. But, it is difficult for these banks and NBFCs to adjust to this structure as they provide various services such as lease transactions, loans, hire purchase, and other non-fund and fund operations.

Moreover, the GST has increased the tax to 18% on services provided by banks and NBFCs. Earlier, only 15% service tax was levied on services of NBFCs and banks.

Also Read: One Year for GST - Pros and Cons

Check out the full classification to evaluate the impact of GST on Banks and NBFCs.

GST and Its Impact on Financial Sector

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1. Difficult Registration Structure

Before the implementation of GST, all the banks and NBFCs maintained their service tax compliance via a centralised process of registering. Even when these banks had different branches in various states and union territories, the compliance registration was not done separately.

With GST, banks and NBFCs need to carry out tax registration separately for every branch they have. Since GST is a destination-based regime, it has formed a multi-stage system. The tax is received at every stage and the tax already paid in the last stage is reduced in the next stage. No doubt, it has streamlined the tax structure and helped the industry with enhanced cash flow, but GST compliance is still a challenge.

2. Hassle of Input Tax Credit

Before GST, banks and NBFCs were able to opt 50% reversal of CENVAT (Central Value Added Tax) credit that was acquired from input services and inputs. The credit for CENVAT on capital goods was reversed without applying any conditions. Now, the terms for this reversal have been changed and for input services, inputs, as well as capital goods, only 50% of availed CENVAT credit is reversed.

In this reference, the impact of GST on banks is great as they are left with 50% reduced credit on capital goods and the cost of capital is overall raised. However, this can be considered as a benefit as well because with a unified tax regime, the production costs are reduced, which automatically increases profitability.

3. Assessment and Adjudication

GST and its impact on the financial sector is seen in the form of assessment and adjudication changes. Previously, banks and NBFCs had to resort to a particular state regulator, in which that branch was registered, for assessment of service tax. With GST, every branch of banks and NBFCs has to justify its chargeability position in the respective state and provide a reason for input credit tax usage in different states.

Additionally, under GST, multiple adjudication authorities are involved. This leads to delay in adjudication as there may be different opinions on one underlying issue. Pre-GST only one adjudication authority was to be contacted for an underlying issue, which was obviously feasible, fast, and convenient for banks.

Also Read: Issues in Filing GST Returns

Transactions Affected By GST

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• Loans offered by banks and NBFCs are not affected as these are money-to-money transactions. Hence, no GST on loan as well on the interest charged on loans.
• In banks or NBFCs, the lease can be either supply of goods or supply of services, both of which attracts GST charges similar to the services and goods that are being leased.
• Hire purchase is a process in which the buyer of asset pays regular instalments and takes possession of the asset from the starting of the agreement. However, the ownership is only transferred once all the instalments are paid. In this transaction, both the cost price and the leasing charges are applicable to GST.

Also Check: Filing GST Returns from Web GST

Benefits of GST for Banks and NBFCs

• Pre-GST, the banks were only able to receive a partial credit of CENVAT and no state VAT credit on procured goods was obtained. Since all the indirect taxes are subsumed to GST, credit for GST applicable on procured goods can also be availed.
• As is widely known, GST curbs tax evasion and reduces the formation of a parallel economy. This will allow financial institutions to reap benefits in the near future with more accounted transactions and increased demand for funds

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GST Impact: Financial Services Industry in India

With the application of GST, the tax bracket has been increased to 18%, which was earlier 15% with service tax. For example, after exceeding the ATM cash withdrawal limit, a certain charge (let’s assume INR 20) plus tax is applicable. With service tax, it amounted to INR 23, but, with GST, it is INR 23.60. However, still, it is believed that this extra tax will be valuable in the long run as the banks will be able to receive input tax credit benefits in an enhanced way.