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Banks will have a hard slog ahead to get GST-ready
May, 30th 2017

The banking sector, one of the largest service sectors in the country, will have to put in plenty of hard work to get Goods and Service Tax (GST)-ready.

While the change in tax rate is grabbing the headlines, that is actually one of the many changes to which banks will have to adjust. For most categories of chargeable banking services, the effective tax rate will become 18 percent from the current 15 percent (at present it includes Swachh Bharat and Krishi Kalyan Cess). Banks will definitely pass on this extra levy on to the customers. As users of banking services, prepare to shell out a bit more.

Lower ITC than manufacturing

Since banking companies provide a lot of taxable and tax exempt services and it since may be tedious to maintain details of taxable and exempt services every month, the government has provided them an option to comply with the provisions of Input Tax Credit (ITC) reversal on proper calculations or avail of 50 percent of the eligible input tax credit on inputs, capital goods and input services, with the rest lapsing.

Higher compliance requirements

At present banks discharge their service tax compliances through a single 'centralised' registration. However, under GST, they would have to take separate registrations for each state where they operate. In addition, there will be an increase in the periodicity of returns, number of return formats and level of details required in these returns.

According to Siva Subramaniam, Product Head – Banking & Financial Services at SunTec Business Solutions, “Manufacturing companies were used to paying state-wise VAT, but banks are centralised, so they face more challenges under GST.”

Banks need to define – origin and destination

GST is a consumption-based tax regime. Hence, for every transaction in GST, the bank will need to determine the place of consumption where GST will be paid. With bank branches conducting several transactions, both within and outside states, determining the place of supply will not be a very easy task.

The Model GST Law casts the onus of determining whether a transaction is intra-state or inter-state on the assessee. So, banks will need to decide whether the payment is against Central GST (CGST) and State GST (SGST) or Integrated GST (IGST), based on the type of transaction.

Moreover, inter-state supplies of goods or services (or both) between two branches of the same bank, located in two States, will also attract IGST. The GST charged will be available as credit to the receiving branch; however, tracking such transactions could prove to be a cumbersome task.

Banks will have to have the GST-ready infrastructure in place. Unlike manufacturing, banks typically have multiple softwares for different lines of businesses and will need to have a GST-ready solution on top for each.

Availing services of unregistered vendors

Another area that may have to be reviewed by banks is taking services from unregistered vendors. While the rules so far specifies that companies availing of services from unregistered vendors (turnover less than Rs 20 lakhs) will be subject to reverse charges (where the recipient is liable to pay tax), as of now there is no clarity if reverse charge qualifies for Input Tax Credit. The government may also specify the limit for availing supplies from unregistered suppliers.

Define jurisdiction of the services availed

The complexity is not just about services rendered but also the services that the banks avail. There has to be a specification of the jurisdiction of the services consumed say between branches (according to states) and the head office. For instance, if a bank avails of advertising services from an advertising agency, it has to specify the percentage distribution of this service across states.

The concept of Input Service Distributor (ISD) is provided in GST. It is defined as ‘an office which can be a head office, administrative office, corporate office, so on, belonging to registered taxable person who intends to distribute the credit’.

Under GST, on an intrastate transaction, CGST and SGST will be applicable. In case of transaction within a union territory, CGST and UTGST will be applicable. IGST will be applicable in case of interstate transactions.

Is the sector ready?

Invoices will have to be uploaded before filing returns. But the above-mentioned backend readiness will have to happen before they file the first tax return on August 14.

According to industry sources, many banks started the preparation as early as January to be ready by April. Private sector banks again have taken the lead in getting backends ready. While the incremental cost is unlikely to jolt numbers, bank employees should nevertheless brace for another round of sleepless nights coming close on the heels of the overtime work that they had to put in the aftermath of demonetisation.

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