GST India: Impact on Banking Sector:

Tax Rate:

Services offered by banks are taxed at 14.5% currently which under GST regime are likely to become costlier at standard rate of 17-18%. Several activities of banks are currently exempt from service tax (Ex: Fund based activities like interest payable on deposits / savings bank accounts and loans disbursed) which would incur GST unless otherwise exclusively exempted. Several services provided to weaker sections of society could get taxed if not exempted making the services costlier.

Elimination of cascading effect:

Banks will also be able to set-off their GST liabilities against credit received on purchase of goods (IT infrastructure and furniture etc.) and resultant savings could get ultimately passed onto end customer. Through the concept of ISD (Input service distribution) the accumulated input credit could be transferred and utilized in cases of locations discharging GST liability are different from location where inputs are received.

Business Process Change:

Banks provide services to customers who are mobile not only pan-India but international as well. Ex: Credit cards issued by Bank from central location to a customer may be swiped anywhere. With advent of net banking the address of customer in account is not where he necessarily stays and obtains banking services (Ex: Cheque book, Loans, Statements etc.) A customer having his account in Bengaluru may during his vacation in J&K transfer funds by mobile/net banking to somebody in Hyderabad. Determining point of supply for services would add significantly to compliance costs. Under such circumstance a bank having presence in only 10-15 states will have to take registration for 37 states/UT.

In case of loans availed by customers, the initial verification is done by outsourced local agencies, loan processing is done centrally, disbursement done locally, repayment done by net banking/ECS mandate. Under such circumstance determining point of supply at each stage is very cumbersome.

Several services by bank to a customer are centralized (Ex: Demat Account, Wealth Management services, bigger home loans etc.) while several others are localized (Ex: Savings account, Personal loan, OD etc.). As is evident these complexities add to compliance costs due to multiple assessments and audits. Clarity on single/multiple ISD registration for distributing inputs across multiple states is needed.

As banks deal with a host of vendors, reversal of ITC for services availed from a blacklisted dealer or dealer who does not discharge his GST liability would lead to increased costs and necessitate additional efforts in tracking dealer status.

Bank Head office also provides services to branches which may become taxable under GST. The IT systems of banks need to be upgraded to meet all these requirements related to multiple registrations, determining point of supply of services, compliance needs and Input Service distribution.

Complying with the requirements of reverse charge and partial reverse charge mechanism would add to further compliance costs.

(The views expressed in this blog are of the author's and do not represent any organization)