The nation readies for a new tryst with destiny. Starting a journey of a new economic regime, this tryst with Goods and Service Tax (GST) – billed as the single biggest tax reform undertaken since independence - aims to free us from the shackles of nearly 500 different kinds of taxes and lead to a unified common market across India. One Nation, One Tax, One Market – this vision of GST captures succinctly what the government seeks to achieve.

At the stroke of midnight hour on August 14, 1947, India had a tryst with destiny. This rendezvous was a special moment in the history of the nation as the country attained independence. Circa June 30, 2017.

The nation readies for a new tryst with destiny. Starting a journey of a new economic regime, this tryst with Goods and Service Tax (GST) – billed as the single biggest tax reform undertaken since independence - aims to free us from the shackles of nearly 500 different kinds of taxes and lead to a unified common market across India. One Nation, One Tax, One Market – this vision of GST captures succinctly what the government seeks to achieve.

While it is too early to say if this historic and landmark indirect tax reform is going to be a win-win for all the stakeholders – whether consumers, retailers, suppliers, the Centre and state governments – concerned, going by the enormity of implementing this Good and Simple Tax surely has the potential to change the face of Indian economy and tax regime. While significant amount of debates and discussions have happened in TV channel newsrooms, through newspaper columns, and speeches by industry leaders and politicians, different sectors of the economy are expected to have varied challenges.

For the man on the street, the impact will be seen in the form of slightly higher fees for banking transactions like funds transfer, ATM transactions, home loan processing, cash handling charges etc as these have been put under the 18% tax bracket in the new GST regime from the earlier 15%. A near similar hike is expected for insurance products and mutual funds, the two most important asset classes in which people generally invest for savings taxes or diversifying their investment portfolio. The good news is that the interest on fixed deposits, bank account deposits etc., which do not attract a charge, will remain so even under the new regime.

For banks and financial services companies, GST is likely to be a mixed bag. This is primarily driven by the nature and volume of operations provided by banks and NBFCs vis-a-vis lease transactions, hire purchase, related to actionable claims, fund and non-fund based services etc. As a result, the impact of this single tax for financial institutions is expected to result in more compliances and higher investment in back-end technology systems

The place of supply will be the location of the recipient of services on the records of the supplier of services. In the digitized and centralized scenario prevailing in India, identifying the state of location of service recipient will be difficult. In cases where the service recipients like professional
s, manufacturers, traders and other workers often shift from one place to other in search of better opportunities, the service provider may have different address namely permanent address, current address, the address of communication and KYC address.

Non-account linked financial services

In case of non-account linked financial services, the place of supply of service would be the location of service provider. This will again impact companies that have operations spread across remote locations but operate and transact from a back office located in some other state.

Requirement for issuance of monthly invoices and bill of supply in case of exempt supplies

According to the GST Act 2017, there is mandatory requirement to issue invoices on monthly basis. While this provision s is applicable under the current service tax regime also, it is creating uncertainty for NBFCs and banks. Most NBFCs and banks issue a loan summary at the inception of the loan that contains detailed EMI schedule and information about monthly charges. They do not issue any monthly invoice for EMI or charges due. However, under the GST dispensation, NBFCs and banks will be forced to consider this as a mandatory provision. This will require making changes in their back-end IT systems resulting in significant challenges.

Also according to the GST Law, bill of supply is to be compulsory issued in case of exempt supplies i.e. interest income in case of banks and NBFCs. This provision is creating significant challenges for players in financial sector. Under GST, they are now required to issue invoice for monthly EMI that will lead to high cost in terms of IT systems and manpower.

Increase in compliances

Currently, financial services companies file centralized service tax returns twice per year irrespective of number of branches in different states. But now they have to file minimum three returns per month per state. For banks and NBFCs having multiple branches in different states, this means additional burden. They will now be required to obtain separate registration, file thousands of return and other compliances, which will ultimately increase the manpower costs and operating costs.

While any business reform comes with its own set of challenges, there are positives too. With GST promising to be a simpler tax regime, companies in financial services sector can look forward to some advantages as well.

Generally, the time of supply for penalty received for late payment of consideration is the time when such penalty is actually received from the customer as against the present service tax regime where the service tax liability triggers as and when such penalty accrues. It may be noted that since the tax on penalty is payable only at the time of receiving payment from the customer, current practice of recording tax liability at the time of accrual will not be required under GST regime. This will result in significant cash outflow savings and improve working capital requirements for banks and NBFCs.

Till now, financial services companies could not claim the input credit for VAT, CST, octroi, and entry tax paid on their procurements. Under GST, financial services companies can claim input tax credit for all these taxes.

At the current juncture, the challenges seem to outweigh positives for financial institutions. For a country of the size and magnitude of India, the previous system of taxation of goods and services is characterized by cascading and distortionary taxes leading to misallocation of resources, hampering productivity and slower economic growth. One thing is for sure, however, that GST is here to stay and in the long run an effective and good tax regime is what India needs to address the issues of multiplicity of taxes, higher compliance costs, and improving the overall investment climate in the country.