How the Goods and Services Tax Affects Banking and Non-Banking Financial Companies

The implementation of the Goods and Services Tax (GST) in India represents a significant change from previous tax systems. Service industries are anticipated to experience a more profound impact from GST compared to manufacturing or trading sectors. Within the financial services offered by banks and Non-Banking Financial Companies (NBFCs), including fund-based, fee-based, and insurance services, substantial transformations from the current landscape are expected. Given the complex and extensive operations of banks and NBFCs, encompassing activities like lease transactions, hire purchase, actionable claims, and various fund and non-fund-based services, achieving GST compliance will be a considerable challenge for these industries.

Challenges and Effects of GST Regulations

Extensive Branch Networks Complicate Registration

Presently, banks and Non-Banking Financial Companies (NBFCs) operating across India can fulfill their service tax obligations using a single, centralized registration. Nevertheless, with the advent of GST, these financial institutions are mandated to secure distinct registrations for each state where they conduct business. Beyond the registration process, the burden of compliance regarding return filing has also significantly risen, encompassing more frequent return periods, an increased variety of return formats, and a higher level of detail required in these filings.

Changes in Input Tax Credit Utilization

Presently, banks and NBFCs often choose to reverse 50% of the CENVAT credit claimed on inputs and input services, while CENVAT credit on capital goods could be claimed without any reversal requirement. Under the GST regime, however, 50% of the CENVAT credit utilized for inputs, input services, and capital goods must be reversed. This change results in a 50% reduction in available credit for capital goods, consequently elevating the overall cost of capital.

Complexities in Assessment and Adjudication Processes

Assessments will be conducted by the relevant state regulators under whose jurisdiction each branch is registered. Consequently, every registered branch of banks and NBFCs will need to provide justification for its tax liability in each state and explain the rationale for utilizing input tax credit across various states.

Under GST, multiple adjudicating authorities may become involved, potentially leading to differing interpretations on the same fundamental issue. This divergence in views could significantly extend the adjudication timeline. Currently, a single adjudicating authority resolves a taxpayer's issue. However, under GST, varied opinions from different authorities will make reconciling and managing these discrepancies challenging.

Challenges in GST Revenue Recognition

Financial Services Linked to Accounts

The determination of the place of supply will be based on the service recipient's location as recorded by the service provider. In India's current digitized and centralized environment, pinpointing the exact state where a service recipient is located presents a considerable challenge. When service recipients, such as professionals, manufacturers, traders, or other workers, frequently relocate for new opportunities, the service provider might encounter multiple addresses, including permanent, current, communication, and KYC addresses.

Financial Services Not Linked to Accounts

For these services, the place of supply is designated as the location of the service provider. This situation particularly impacts companies that maintain a broad presence in remote areas to serve local markets but conduct their core operations and transactions from a centralized back office situated in a different state.

Actionable Claims Under GST

Previously, actionable claims were not classified as a service under the Service Tax regime, meaning no tax was levied. However, under GST, actionable claims are now encompassed within the definition of