Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: cpt :: form 3cd :: TDS :: empanelment :: articles on VAT and GST in India :: VAT RATES :: due date for vat payment :: TAX RATES - GOODS TAXABLE @ 4% :: ACCOUNTING STANDARDS :: ACCOUNTING STANDARD :: VAT Audit :: Central Excise rule to resale the machines to a new company :: list of goods taxed at 4% :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: ARTICLES ON INPUT TAX CREDIT IN VAT
 
 
« Service Tax »
 6 reasons you need not fear the GST regime
 Tax return filing extension on GST may not be enough
 GST: ‘Tech readiness, tax administration key challenges’
 GST return filing rules relaxed for Jul-Aug, July 1 rollout
 GST Council gives return filing breather to India Inc for 2 months
 All eyes on 18 June as GST Council meets to iron out niggling issues
 GST Council's June18 meet to finalise e-way bill, anti-profiteering rules
 Valuation of Tax liabilities Under GST Regime
 Govt to go soft on GST monitoring for a few months, let traders settle down
 GST to have negative impact on oil and gas industry
 GST and You: How are free samples treated under the new tax regime?

Applying Goods and Services Tax to financial sector is challenging
May, 26th 2010

One of the most significant features of GST would be the taxation of financial services. No country in the world has been able to design a model for inclusion of financial services within the VAT/GST framework. India, if successful, will chart a new course, which could well become a model for the rest of the world to emulate.

Historically, activities of the financial intermediaries have been exempted from VAT, the prime reason being the non-explicit nature of the charge for the services provided by the intermediaries and the consequent difficulty in determining the tax base. For example, the consideration by a bank for intermediation between borrowers and depositors is the interest margin or the spread between interests received on the loans and paid on the deposits. This margin, while known in aggregate, cannot be readily computed for individual loans and deposits.

While the exemption avoids the need to measure the tax base for financial transactions, it gives rise to distortions in the financial markets. For instance, the denial of credit to the exempt financial institutions for the VAT charged on their inputs creates disincentives for them to outsource their business process operations. Where they render services to business clients, the blockage of input tax credits results in tax cascading, adversely affecting their competitive position in the international markets.

Given the rapid expansion of the financial services sector and the progressive nature of the tax on financial services, particularly in the case of developing countries, the modern approach favours taxation of financial services, with exemption limited to instances where there is no practical method of applying the tax.

India applies service tax on almost all financial services, with the exception of gains from trading in securities and interest margins. The GST task force of the Thirteenth Finance Commission has recommended that GST be extended to all financial services using the so-called cash flow method or other variants.

It is interesting to note that the International Monetary Fund (IMF), in its interim report for the G-20 nations on a fair and substantial contribution by the financial sector, has recommended a Financial Activities Tax (FAT) to be levied on the sum of profits and remuneration of financial institutions. Given that the FAT base is similar to that of GST, countries like India may well choose to respond to the IMF proposal by applying GST to financial services, rather than enacting FAT as a separate levy.

Certain technical issues would need to be addressed in extending the base of the service tax to all financial services under GST. For example, consideration could be given to bringing interest margin within the tax net on an aggregate basis, as opposed to each transaction separately. To avoid tax cascading from taxation of business transactions, the aggregate margin could be bifurcated into B2B and B2C components, and the tax applied to the B2C margin only.

In the case of insurance, currently the service tax is applicable to gross premiums, excluding the savings element. However, the proper base for GST would be the net underwriting income of the insurer, i.e., premiums as reduced by claims, as is the case in New Zealand, Australia and Singapore. These models could be readily adapted for the Indian GST.

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2017 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Privacy Policy

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions