JANUARY 27, 2017

By K R Ramankutty, CA

1. ON analysis of Model GST law (revised), it appears, the same has been framed without sufficiently understanding the business transactions of the banking and NBFC sectors. Some of the issues which require consideration of the Government in framing suitable provisions of law are discussed below.

Taxability of interest income earned by Banks and NBFC:

2. As per the existing law, no service tax is chargeable on interest on deposit,loans or advances being an item appearing in the negative list of services. Further, by virtue of rule 6(2)(iv) of the (Determination of Value) Rules, 2006 interest on delayed payment of consideration for rendering service or sale of property is not to be included in the value of taxable services.

2.1 The Model GST Act, Schedule III lists out certain services which are not treated as goods or services. The schedule includes some of the services mentioned in the negative list of services. As exemption is not specifically provided elsewhere as per the Model GST Act, interest on loan, deposit, delayed payment of consideration for rendering the service etc. becomes taxable under GST. Unless exemption is provided, it is bound to affect the borrowing cost of the common man who is not entitled to any input credit mechanism. From a reading of Section 17(3) of the Model GST Act, it appears interest is likely to be exempt from GST as bank and NBFC are required to reverse 50 % of the input credit.

Taxation of penal interest, late fee, penalty etc. section 15(2)(d):

3. As per Rule 6(2)(iv) of the (Determination of Value) Rules, 2006 interest on delayed payment of consideration for rendering service or sale of property is not to be included in the value of taxable services. However, the same has been proposed to be taxed by including in the value of taxable services by the amendment proposed under Section 15(2)(d). This is going to be a tax cost to the B-2-C customers, mainly ordinary citizens from the weaker sections and may warrant a review.

Uploading of returns - GSTR-1 where invoice cannot be raised due to the nature of transactions

4. The GSTR-1 which is the return of output supplies has to be uploaded by supplier of service. The fields in the return include invoice number, GSTN number etc. Under the existing rule 4A of the Service Tax Rules, 1994 relaxation has been given to Banking and NBFCs from issuing serially numbered invoices. The draft GST Invoice rule 5(2) also provides for similar relief. Therefore, serial number of invoices cannot be provided in serial number 5 of the GSTR-1. There are transactions like ATM card transactions where the settlement takes place between banks through the NPCI [National Payments Corporation of India] platform. The settlement of inter-bank claims is on the basis of NPCI statement and no invoices are raised for the purpose. The service tax liability of the member banks is discharged based on the basis of NPCI statement.

4.1 In the absence of serially numbered invoices being raised by the banks, GST liability for the supply of service cannot be uploaded to GSTR-1. Unless a different return format is designed instead of GSTR-1, bank and NBFC will find it difficult to upload the service tax liability to GSTN. This will also affect the input credit availment by the customers of the bank. One probable solution for the above would be to issue serially numbered invoices registration wise in the case of B-2-B customers and government recognizing the monthly settlement statement of NPCI with serial number equivalent to an invoice and recognizing the same as an eligible document for availing the input credit. This will also help the banks to avail input credit based on NPCI statement which credit is lost presently due to dispute being raised by the Central Excise Department. The input credit available to banks on account of recognition of NPCI document is a huge sum.

Definition of "address on record": section 2(3) of Model GST law

5. "Address on record" is defined as "the address of the recipient as available in the records of the supplier". In many cases, it happens that the KYC address can be in a different state, while the account is opened in the state where the recipient of service resides due to his employment /business in the state. If the local address is to be considered for GST, the transaction will be intra-state transaction. If KYC address is to be taken as address on record, then the transaction will be inter-state. This will lead to disputes and double tax payment as both the SGST authorities and IGST authorities would like to have a pound of flesh. The address on record has to be clearly defined as KYC address or address in the state where account is opened to avoid disputes in this regard.

Credit availability reduced.

6. As per the Cenvat Credit Rule, 6(3B), 50 % of the Cenvat Credit availed on input and input services availed is liable to be reversed. In other words,Cenvat credit availed on capital goods was not liable for reversal under rule 6(3B). The proposed Model law (revised) Section 17(3) provides for reversal of 50% of the input credit including credit availed on capital goods which is another fatal blow to Banking and NBFC sector.

Branches all over India, facility of Centralized registration to be continued

7. Presently, Banks and NBFCs having branches all over India have centralized registration and half yearly service tax returns are filed. In the GST scenario, registration per state and returns per registration will be required. This leads to complications in control and administration in addition to number of returns per annum depending upon the number of registrations. The decentralization leads to a lot of practical difficulties in availing the input credit, payment of taxes and uploading of the returns which can be avoided by mandating centralised returns.

It is earnestly hoped that the above minor hiccups are taken care of while finalizing the GST law.