In India, banking sector is one of the largest service sectors. Implementation of GST is challenging specifically for this sector due to the higher rates as compared to the current service tax rate mechanism.

GST on banking

Transaction fees in financial services such as credit card payments, fund transfer, ATM transactions, processing fees on loans etc is increased to 18% tax bracket in the new GST regime.

  • The hike in the tax rate means, individuals will have to pay Rs 3 more for every Rs 100 paid as charges/fees for banking transactions.
  • Most banks have now applied transaction charges on cash withdrawals from different bank ATMs or cash withdrawals from branch (first 5 transactions is free).
  • Bank branches provide services to each other, which will be taxable under GST (they can later claim input tax credit). But this will increase the paperwork and the operating cost also.
  • Good news for business consumers is that they can claim ITC on the banking services paid on their business accounts.

GST on Mutual Funds

GST impact on returns of mutual funds will definitely affect the consumers. Expense ratio is the cost incur by an investment company to operate its mutual fund.

  • The GST will be on Total Expense Ratio (TER) of the mutual fund and will go up by 3%.
  • Policyholders have to pay higher premiums on their insurance. Assuming, a family spends a total of Rs 50,000 p.a. on insurance excluding service tax, their expenses will increase by 3%, i.e., Rs 1500.
  • Mutual fund distributors earning up to Rs 20 lakh will remain exempted from GST.

Challenges

  • State wise Registration Requirement

Currently, all banks have centralized registrations under the Service Tax laws for all its branches. Branches of banks in multiple states & Union Territories (UT) will now require separate registrations under GST.

Under GST, all records have to be maintained for each state separately. This will be cumbersome and challenging at the same time. In case a bank has multiple branches in one State, only one registration is required for all the branches in that State.

Therefore, government should provide some special scheme to the banking sector to reduce the burden of banking sector largely differs from that of other industries.

GST is a place of supply based tax regime. Bank branches usually conduct transactions, both within and outside states therefore determining the place of supply will not be easy. The place of supply of the bank, they need to decide whether the payment is against CGST, SGST and IGST based on the type of transaction (intra-state or inter-state).

For example, inter-state supplies of goods or services (or both) between two branches of the same bank, located in two States, will also attract IGST.

Keeping in view the large number of transactions in the banking sector, taxpayers need not mention the serial number in their invoices and the address of the customer.

  • Taxability of Interest’

In the current tax regime, interest is not taxed. Also, governments across the world do not impose GST on interest. If interest is not expected to attract GST, it will have implications on Input Tax Credit claimed by banks.

  • Paying GST at applicable rate

Now-a-days, banks also deal in commodities like gold/silver on which a concessional GST rate is expected to be applicable. Therefore, banks need to be careful in paying GST with the appropriate applicable rate on different products.

Conclusion

Implementation of GST will create a fuss for banking sector. Consumer will be charged 3% more under GST. There is a lot of confusion about how banking sector should charge their customers. Intra-state and inter-state transactions will also become a cumbersome task for the bank.

In case you are confused about GST as a business owner, feel free to consult the GST experts at LegalRaasta. You can get comprehensive assistance on GST Registration and GST Return Filing. You can also use our GST software for doing end-to-end GST compliance.