Coming to the financial sector, GST has a widespread impact on Banks and NBFCs alike. In fact, services sector are more affected by GST than the manufacturing/trading sector. Hence, financial services that are based on funds/fee/insurance, are seeing a major shift from the previous tax scheme. Here’s a look at the impact that GST will have on the banking sector:
- Registering branches to be a hassle: Under the previous tax regime, it was possible for Banks with pan-India operations, to have a centralized registration. However with GST, Banks and NBFC’s will now have to obtain separate registrations for branches in every state. This also enhances the compliance burden for filing returns substantially for them.
- Leveraging and de-leveraging of ITC: Banks and NBFCs would generally opt for the reversal of 50% of CENVAT credit in the previous tax scheme against input/output services. The CENVAT credit could also be availed on no reversal conditions. However, with GST in place, 50% of the credit has to be reversed, which leaves financial institutions with a 50% reduced credit. Thus the cost of capital has been increased for them.
- Assessment and Adjudication are now troublesome: Earlier respective state regulators would conduct the assessment for branches, however, now every registered branch and NBFCs have to justify its stance on chargeability and utilization of Input Tax Credit in different states. Also, the involvement of more than one adjudicating authority means a difference of opinion may be possible, thus prolonging the process.
Revenue Recognition under GST
- Financial Services that are Account Linked: For account linked financial services, the location of the recipient will be determined by the place of supply. In cases where service recipients keep shifting bases, on the basis of better opportunities, location tracking will be difficult and may pose problems, when it comes to the permanent/current address, communication/KYC address of the service provider.
- Financial Services that are Non-Account Linked: In the case of non-account linked services, the location of the service provider is going to be considered as the location of service supply. This will again be a problem for companies that are widespread in various locations but operate from a back office, in a separate state.
- Actionable Claims: Actionable claims were not considered as a service and hence were non-taxable under the previous tax regime. With GST, however, they are now files under supply of goods and will be taxable.
For the banking sector, the new GST regime brings in a lot of challenges in terms of transaction, customer profiles, IT systems etc. for capturing both front and back-end data. This will require vigilant IT operations and the ability to process high volume data, in order to be ready for complete GST compliance. What do you think about the impact of GST on the banking sector? Tell us your views in the comments section below.