📊 GST Applicability & Tax Rates on Banks and NBFCs

🏦 Introduction

The introduction of the Goods and Services Tax (GST) marked a significant shift in India’s indirect tax regime, impacting various sectors — including Banks and Non-Banking Financial Companies (NBFCs). These entities provide a range of financial services and are subject to GST for certain transactions and operations.

🧾 What is GST?

📌 Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based tax levied on every value addition. It replaced a host of indirect taxes like service tax, VAT, and excise duty.

🔍 GST Applicability on Banks & NBFCs

✅ Services Covered Under GST:

1. Processing Fees

2. Loan Documentation Charges

3. Cheque Bounce Charges

4. Account Maintenance Fees

5. Forex Services

6. Credit/Debit Card Charges

7. Investment Advisory Services

📌 All of these services are considered taxable supplies under GST.

❌ Exempted Services:

🚫 Interest on loans and advances is exempt from GST under Notification No. 12/2017 – Central Tax (Rate).

Note: The exemption applies to interest only. Ancillary services still attract GST.

GST Applicability on Banks and NBFCs

1. Taxable Services

Under the GST regime, most financial services offered by banks and NBFCs are taxable at a standard rate of 18%. These services include:

• Processing fees on loans

• Documentation and inspection charges

• Issuance of demand drafts and cheque books

• Credit card services

• Bank guarantee commissions

• Ledger folio and statement issuance charges

• Standing instruction charges

• Loan takeover charges

• Charges on cheque bouncing

• Sale of repossessed assets

These services are subject to GST as they are considered supply of services under the GST law.

2. Exempt Services

Certain financial services are exempt from GST, primarily those involving transactions in money. Exemptions include:

• Interest or discount on loans, deposits, or advances (excluding interest on credit card services)

• Inter-bank transactions such as repo and reverse repo

• Income from commercial papers or certificates of deposit

• Collateralized Borrowing and Lending Obligations (CBLO) transactions

• Sale of derivative futures contract

These exemptions are outlined in Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017.

🌍 Place of Supply Rules (For IGST/CGST/SGST)

• B2B Transactions: Place of supply is the location of the recipient.

• B2C Transactions: Place of supply is the location of the service provider.

• For cross-border transactions, reverse charge mechanism (RCM) may apply.

🔄 Input Tax Credit (ITC)

📌 Banks and NBFCs are eligible for Input Tax Credit, but under a special provision in Rule 38 of the CGST Rules, they can avail either:

1. 50% of the eligible credit on inputs, input services, and capital goods, or

2. Full credit only on specific services used exclusively for taxable supplies.

⚖️ Challenges in GST Compliance for Banks & NBFCs

🚨 Key issues include:

• Complex valuation of bundled services

• Difficulty in identifying place of supply

• Managing multiple registrations across states

• Restriction on ITC availing

📚 Conclusion

Banks and NBFCs play a critical role in financial intermediation and are significantly affected by GST provisions. While GST aims for uniformity, the sector still faces compliance complexities due to the nature of financial services. Understanding the nuances of GST applicability, tax rates, exemptions, and ITC is essential for proper tax planning and regulatory adherence.