Implementation of GST is standing true to its slogan of ‘One Nation, One Tax’ and turning it into reality. GST is making an impact on every business sector in the country, including the service sector. The service sector, most specifically, financial services based on funds and insurances, (Non-Banking Financial Company) NBFCs and Banks are impacted the most.
Withdrawing money from an ATM has become easier owing to its presence in every locality, irrespective of whether you have an account in that bank or not. However, almost all of us have received a text message or a phone call from our respective banks where we have an account, informing us that after a certain number of transactions and specific amount withdrawal the bank will charge us a nominal fee as per the instructions of the Reserve Bank of India. Though this isn’t new to us now with the implementation of GST, where service tax was earlier charged at 15 percent now, it will be replaced by 18 percent GST.
As per the reports, service sector’s accountability for India’s GVA is around 53 percent, and the Financial sector is one of the key contributors among other service sectors. There are many countries like Australia, Singapore, New Zealand, etc., have exempted Financial sector largely from applying GST. The Indian government has, however, not excluded Financial sector from the GST regime which makes the sector in need to come up with effective ways which will enable the sector to maintain its position as a key contributor in India’s service sector. GST compliance will be difficult to implement in banks and NBFCs as they provide different operations like lease transactions, fund and non-fund based services, hire purchase, etc.
The framework under the Model GST Law does not allow a lot of benefits or consideration to NBFCs and banks for understanding the type of transactions they make consistently and on a large scale. Some impacts and issues relating to the provisions in the Model GST Law are discussed below.
During the pre-GST regime, banks and NBFCs with Pan-India operations could release its service tax compliance by a single centralised registration process. Now, under the current GST regime, these banks and NBFCs need to get different registration for each state that they work into. Along with the burden of GST compliance, the filing of returns has also expanded generously wherever periodicity of returns, level of details needed in such returns and number of return formats are concerned.
Banks and NBFCs had an option of reversing 50 percent of CENVAT credit which was availed against the inputs and input services, while CENVAT credit for capital goods was available without a reversal condition, during the pre-GST regime. Under the GST regime, however, 50 percent of the CENVAT credit made available against inputs and input services as well as capital goods, is to be reversed mandatorily. This implication leaves banks and NBFCs with reduced credit of 50 percent on the capital goods further increasing the cost of capital.
The assessment was performed by the state regulators under which a particular branch is registered in the previous tax regime. Now, under GST, all registered branches of banks and NBFCs will need to justify its position as per its chargeability in a respective state and a valid reason for using ITC in different states. As far as adjudication is concerned, the process will be prolonged owing to more than one adjudicating authority and the difference in their opinions on a similar underlying issue. Under the pre-GST regime, a taxpayer was adjudged by only one adjudicating authority for an issue. Under GST, dealing with the difference in the opinion by different authorities has become difficult.
There are certain services provided by banks and NBFCs that are impacted by the implementation of GST. Some of the services include
With the implication of GST on the financial sector as well, its impact on banks and NBFCs will need to reconsider its operations, accounting, compliance and transactions entirely. Moreover, the IT system will have to be vigilant enough to solve the complexities related to GST procedures and compliance at a higher volume.