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Impact of GST on Banking Sector in India

Impact of GST on Banking Sector in India

GST will be a game changing reform for the Indian economy by creating a common Indian market. There would be a direct impact on the taxation structure, tax computation respective payment, compliance and credit utilization, leading to a complete overhaul of the current indirect tax system.

In India, most of the banking and financial services are exposed to service tax, at the rate of 14.5 percent, while GST is expected to be 18 percent to 20 percent. Thus, services are likely to get costlier.

  1. Tax Rate    
  2. Elimination of cascading effectGST impact on Banking sector Sailotech
  3. Business Process Chang

Tax Rate

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

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. 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.

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.

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.

Clarity on single/multiple ISD registration for distributing inputs across multiple states is needed as some services are centralized and some are localized.