By Sushil Solanki, Principal Commissioner of Service Tax (Rtd) & Vishal Agrawal, Partner, TLC Legal
CURRENTLY, the power to levy and collect Service Tax on all services is with the Centre. With the introduction of GST, the States would also be empowered to levy GST on services. Accordingly, on the same activity, there would be two levies, namely Central GST (CGST) and State GST (SGST), levied and administered by the Central Government and State Governments respectively. For inter-State supply of services, integrated GST(IGST) would be levied and collected by the Centre, which will be shared with the States.
1.2. Banking sector is one of the largest service sectors in India. There are at least 25 PSU banks and 20 private sector banks in India operating through more than 1 lakh branches spread across India. Most of these banks shave opted for centralized registration in terms of Rule 4 of Service Tax Rules, 1994 (STR) as the same is beneficial to them in many ways – they can file consolidated return for all branches, utilize credit at a single place of centralised registration, follow uniform legal stand and procedures. Centralized registration also obviates the need for ISD (Input Service Distributor) registration as the credits availed are meant for other branches of the bank situated in all States.
1.3. The draft Model GST Law (Model Law) released recently by the Government for comments from public has thrown up several issues for the banking sector. Some of these have arisen on account of inherent features of GST due to devolution of power to levy tax on Services to the States. Several ambiguities that have crept into the Model Law can be avoided by coherent drafting of law and insertion of certain provisions, which could increase ease of doing business for banks. These issues are discussed below:
2.1. As per Model Law, banks having branches in multiple States and Union Territories (UTs) will be required to obtain registration in each such State and UT. UTs having Legislatures have also been treated as States in terms of Article 366(26B) proposed to be inserted in the Constitution. Currently, banks follow the Zonal or Regional structure where for one large State, there may be more than one Zone and conversely, one Zone may comprise more than one State. GST would require restructuring of accounting, administration and control mechanism in the IT systems and processes of banks to be able to maintain financial records of each State separately.
2.2. Whether Jammu & Kashmir will also adopt GST laws or not is still unclear. However, Section 1 of Model Law provides that it extends to the whole of India, in contrast to the existing Service Tax Law which extends to the whole of India except J & K. Banks need clarification on this issue as well, for re-designing their IT systems and other processes to prepare for implementation of GST.
2.3. Another issue which needs clarification is, whether the UTs of Dadra & Nagar Haveli (DNH), Daman & Diu (DD), Chandigarh, Andaman & Nicobar and Lakshadweep, which do not have State Legislature, would adopt the provisions of SGST law (and if so, of which State) or they would subsume applicable SGST into CGST. This issue may appear small, but it requires immediate clarification because many of the banks have their offices in these UTs as well.
3. Place of supply of goods and services
3.1. In GST regime, SGST would be earned by the States where the goods or services are finally consumed. To determine this aspect in the context of services, is quite tricky and complicated. Several overseas jurisdictions having VAT / GST have faced lot of problems on account of this. For administrative reasons and for other considerations, Place of Supply of Services Rules (POS Rules) are framed to determine whether a particular transaction of provision of service is within a specified region or outside that region. In the context of Indian GST, each State would like the POS Rules to be framed in a manner that it gets the maximum revenue. However, the interest of tax payers also needs to be kept in mind while framing these Rules.
3.2. Section 6 of draft IGST Act provides the POS Rules for supply of services. Section 6(13) provides that in the case of banking and other financial services (BOFS), the place of supply shall be the ‘location of the recipient of service’ on the records of supplier of services. The term ‘location of the recipient of service’ has been defined under Section 2 (64) of Model Law. It is pertinent to note that the location of recipient has been defined on the basis of place of receipt of supply of service. Accordingly, in order to determine as to what would be the place of supply of service, it would be necessary to determine the “place of receipt of supply of service”. To illustrate, if a bank in Mumbai has disbursed a loan for setting up a plant in Rajasthan, GST paid on the loan processing charges may have two possible places of receipt of supply of service. One view could be that supply has been received in Rajasthan because the loan pertains to setting up of plant in Rajasthan. Alternate view could be that since the invoice has been raised on borrower’s Mumbai office, place of receipt of supply of service should be Maharashtra. Current draft of Section 6 (13) gives an impression that it is the responsibility of the bank to determine where the supply of serviceis going to be received and accordingly decide as to whether SGST or IGST is to be paid for the benefit of State ‘X’ or State ‘Y’ .
3.3. The Model Law, in its present form, may lead to a lot of disputes on this issue and the banks could get enquiries from the Department of the interested States requiring the banks to show as to why they have treated a particular supply as a local supply so as to invoke provisions of SGST law instead of treating it as inter-State,and accordingly, not invoked the provisions of IGST law and vice versa. It is relevant to note that net revenue impact to a particular State would be the same irrespective of whether the supply is considered as a local supply or inter-State supply. In the above example, if the bank were to pay SGST in Maharashtra initially, the ISD of the borrower in Maharashtra would be required to transfer the credit to the State of Rajasthan through the mechanism of IGST, as services are meant to be consumed in Rajasthan. In this manner, the revenue would in any case, ultimately reach the State of Rajasthan, though initially, the tax would have been paid to the credit of State of Maharashtra. To avoid such disputes and uncertainty, it is suggested that the place of supply of BOFS should be deemed to be the address of the recipient of service (and not its location) in the bank’s records.
3.4. Further, banks also provide different services like giving of loans, opening of Letters of Credit, issuing of Demand Drafts, money changing etc. It is possible that actual recipient of such services may be different offices/ plants of the customer situated in different States and therefore, there could be a doubt as to whether each time, the bank would be required to capture the location of the recipient of service for each transaction. This could create chaos and pose great difficulties for customers of banks to provide relevant information to the banks.
3.5. Furthermore, in Section 6(13) of Draft IGST Act, it is provided that if the service provided by the bank is not linked to the ‘account’ of the recipient of the service, in such cases, the place of supply shall be the location of service provider. In the current Place of Provision of Services Rules, 2012, the term ‘account’ has been defined whereas the Model Law does not define this term. It is also not clear whether the intention of the Government is to exclude only the service provided to a person who is not a customer of the bank or whether it wants to exclude the services which are not in relation to the savings /current bank account operated by a customer. Investment banking services or De-mat services or custodian services are some of the services given by the bank which may not have a relationship with the account operated in the banks.
4.1. As per Schedule-I to the Model Law, certain transactions are to be treated as supply, even though they are made without consideration. Serial No. 5 of Schedule-I provides that supply of services by a taxable person to another taxable or non-taxable person in the course of business or furtherance shall be treated as a supply even if it is without consideration. As per Model Law, since banks would be required to take State-wise registration, inter-State supply of service, even to one’s own branch would attract payment of IGST and the valuation will be determined in terms of the Valuation Rules. At times, specialised functions of banks are centralized in one or more branches whereas other routine operations may be carried out in different branches. A classic example is of forex transactions where in the commission income is shared among various branches. Thus, banks would be required to identify all such transactions and develop a mechanism for valuation of shared income for the purposes of paying IGST.
5. Input Tax Credit
5.1. Currently, the Cenvat Credit Rules allow an option of availment of credit of upto 50% by a bank in order to avoid proportionate reversal, which is useful to the banks since it has minimized disputes relating to reversal of credit pertaining to the services or goods used for provision of exempted services. Government should consider introducing such a provision in GST law as well, for ease of doing business.
6.1. Section 25 of the Model Law requires uploading of invoices on Goods and Services Tax Network (GSTN) by 10th of the next month. It means wherever the recipient of service wants to avail input tax credit, each and every document, where under certain fee or commission or charges have been charged and on which GST is levied, is required to be uploaded electronically on the GSTN by the service provider. It is a fact that banks do not issue commercial invoices for every service rendered. Currently, Rule 4A of STR provides a waiver in such cases. However, no such provision has been incorporated in the Model Law. It would practically be a very difficult task to issue invoices for such small amounts and uploading them on GSTN. It is suggested that a special dispensation may be given to the banks on the lines of the existing rule. Further, the banks may also be given an option to generate a consolidated invoice at the end of the month for each customer, which would be uploaded on the GSTN and on the basis of which, the customer can take the credit.
7. Re-possession of assets of defaulters
7.1. Currently, when a bank re-possesses assets from a defaulter of loan and sells the same, VAT is paid by the bank as a ‘dealer’ in terms of State VAT laws. Interestingly, Clause 4(3) of Schedule II of the Model Law provides that in such cases, the defaulter would be deemed to be the supplier. Further, there appears to be an inadvertent error in drafting of this Clause 4(3) in as much as, while the said Schedule is for the limited purpose of deciding whether an activity would be an activity of supply of goods or service, the provision appears to go beyond that purpose and determine as to who would be the supplier in such cases.
8. Benefits to banking industry
8.1. Under the existing CENVAT mechanism, banks are eligible to take partial credit of excise duty and service tax paid on procurement of qualifying goods and services which are used for provision of output service. However, banks do not get input tax credit of State VAT paid on any goods procured by them. As all these indirect taxes will be subsumed in GST, banks will be able to take credit of GST paid on procurement of goods as well, subject to appropriate disallowances, if any.
8.2. Further, unlike CENVAT regime where input tax credit is denied on procurement of various specified goods and services, under GST regime, input tax credit is proposed to be allowed on majority of goods and services which would be used or intended to be used by a bank for making an outward supply in the course of furtherance of business.
8.3. Lastly, since one of the objectives of GST is to reduce tax evasion by curbing the parallel economy and widen the tax base, the business of banking in general is expected to increase due to additional demand of funds and greater volume of accounted transactions.
Above issues have been noticed on the first reading of Model Law and there may be many more issues which may require clarification or modification in the Model Law. Nevertheless, to start with, the Government should forthwith consider the abovementioned issues as these are fundamental for starting any work for developing the IT systems and other processes in the banking sector.