GST impact on Banking sector | CA Madhukar.N.Hiregange & CA Mahadev.R

GST impact on Banking sector

By CA Madhukar.N.Hiregange & CA Mahadev.R

GST was recommended in 1978 and could see the light on 1st July 2017. GST which would replace 11 indirect taxes in India has impact on all major business sectors. Banking industry  would get impacted significantly. Obtaining separation registration in each State, identifying inter-state transactions, valuation, operational restructuring, reconciliation of branches Statewise, filing of returns on monthly basis are some of the challenges. In this article, we have discussed few issues which could impact the banks.  

Banks would be having multiple branches spread across different states and the transactions would also be voluminous. GST levy is on supply concept which is very wide. Banks need to review all the income transactions to assess GST impact. All reports and returns are being automated in GST law. Therefore, compliance plays a key role in GST and it is expected that compliance would substantially increase for the banks due to the numbers.

Complexities in the nature of transactions

The banking industry has come up with many ways of doing business where the transaction trials are very difficult to identify even for the banking employees. All the banking transactions are routed through CBS (Core Banking System) where debits and credits of lakhs of transactions happen on real time basis. Banks deal with number of diversified partners right from the Government till the individual citizens. Further the accounts are maintained at home branch where in the services are received by the customer at any of its branches located anywhere in the world which would be transacting branch.

The GST impact needs to be analysed at each level of operations like cheque / Drafts/ cards/ issue process, ATM operation, credit wing, securities, letter of credit, net banking, cash backs and reward points, loans and advances, deposits, point of sale transactions and it goes on and on. The conditional free services say free cheque books for maintaining minimum balance of certain amount could be subjected to valuation issues unless care taken.

The major challenge for each bank would be to identify and understand its own nature of supplies, the transaction flow and then the place & time of supply of such supplies, the valuation in absence of consideration and majorly identification of the location from where the service is rendered.

Banks have the practice of providing a number of facilities to its officers (staff at various grades) like free /concessional accommodation, food, travel, health kits, vehicles, loans, etc provided over and above the terms of employment. These benefits are liable to  GST. Schedule I covers  for the same. Segregation of so many facilities into either gifts, or supply of goods or services would be difficult for the management.

Registration woes

Unlike service tax law, there is no concept of centralised registration in GST. State wise registration needs to be obtained in each state where there is business. Even if ATMs are installed without actual branches, then also registration could be required under GST, though it could the fixed establishment of the vendor who manages them. More number of registrations lead to more administrative woes. Keeping track of expenditures incurred, ascertaining the type of tax applicable, distribution of credits etc. would pose challenge as these aspects to be taken care at state level rather than at central level.

Normally banks have one Head Office, multiple Zonal Offices and then Regional Office and then comes the branches. Selection of principal place of business in each State itself could be an issue. Adding all the other place of business in the registration would be a practical challenge considering the number of branches in a state.

If there are common expenses incurred at a particular location, then there is also a need for obtaining input service distributor (ISD) registration in GST to distribute input tax credits. If there is inter-unit billing system, this need may not arise.

Increased compliance

State wise registration warrants State wise record keeping, assessment and audit compliances. It also means State wise filing of returns. The common returns to be filed in GST are GSTR-1 (outward supplies), GSTR-2 (inwards supplies) and GST-3 (Consolidated return). If the banks obtain ISD registration, then there is an additional return to be filed in form GSTR-6. There is a matching concept which is being introduced in GST for credits. If the details of outward supplies uploaded by suppliers and disclosed by assesse are not matching, then there is a threat to credits. Therefore, there is a need for reconciliation of inward and outward supply details on monthly basis. Such reconciliation is needed for each registered state. Considering the number of branches a bank can have in a State, the reconciliation  would take substantial time and would need automation.

Cost of compliance could also go up as banks would be filing returns broken into 3 different days every month for each State as against  one ST-3 return on half yearly basis at central location.

Further, banks need to keep track and record of services provided to other branches located in other States and the services provided to State/ Central Government which are subject to reverse charge mechanism at registration level.

Even the statements issued by the banks in lieu of invoices need to contain all the mandatory requirements of a tax invoice except the consecutive serial number and the address of the recipient of service. This would certainly increase the compliance work at each transaction level.

Impact on input tax credit

Normally banks do not avail credit of VAT paid on procurements as generally there would not be any sale of goods. In rare cases, there could be sale of repossessed assets from customers on account of payment default. Service tax paid on input services is eligible as credit. However, as the interest income of banks are exempt from service tax, there is an option of availing 50% Cenvat credit of service tax paid on input services. This is under Cenvat credit rules 2004. The excise duties or import duties paid on capital goods are allowed to the extent of 100%.

Section 17(4) of CGST law also allows 50% credit benefit on input services. However, the law requires 50% credit availment even on capital goods which would be disadvantageous for banks as earlier they were eligible for 100% credit. However, there would be increase in credit as banks would get credit of tax paid on purchase of all inputs including security stationeries, debit/ credit cards, printed materials and huge amount of business assets like computer equipment which hitherto was not eligible. Tax paid on all stationery items such as bill books, cheques, challans etc would be eligible for credit of 50%. This 50% restriction is not applicable for inter unit billings. In other words, if there are inter branch billings, full credit of tax charged in invoice would be allowed if such branches have common Permanent Account Number (PAN).

Updating location of customers to identify type of tax payable

In case of banking services, the place of supply of services for levy of GST would be location of service receiver on records of bank. Not updating the locations of customers especially business customers could result in payment of wrong type of tax and denial of credit to customers. For example, for a customer who is in other state, if local CGST and SGST is charged, the customer would not be able to claim credit. This results in refund scenario and all of us know that getting refund from government department would not be easy. There is a need to update customer profiles to ensure that correct type of taxes are charged with proper registration number of customer.

Where the customer is located outside India, the place of supply would be the location of bank and accordingly local SGST & CGST needs to be discharged on such transactions.

Tax payable on interbranch billings

In case of inter branch billings wherein branches have separate registration numbers, GST would be payable on any supply of goods or services. At each branch level, such transactions to be tracked for payment of GST.

Identification of individual support services rendered among interstate branches itself is practically impossible for any banking company. The representations have been made to the Government to exclude the inter unit transactions from the GST net for the banking and financial institutions which is uncertain till date.

However, the value which is charged by one branch to another in different states would be deemed to be the open market value for the purpose of valuation. This comes as a major relief to the banking industry as valuation method adopted in case of inter branch billings would not be subject to litigation. Still the reasonable mechanism to arrive at the value of inter branch services would have to be identified for better compliance.

The valuation mechanism should be configured in systems as all the banking processes are automated. Till today self-service or self-supply of goods was not subject to tax. In GST regime, this would change. Banks need to prepare well for implementing these changes for better compliance under GST.


The issues discussed above are only illustrative. Banks would for sure face lot of challenges for transition to GST from present indirect taxation system. Professionals have a major role to play in assisting the banking sector for implementation of GST for smoother transition. Chartered accountants with knowledge of IT are more suited for this job.

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