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Tax Rate:

Services offered by banks are taxed at 14.5% currently which under GST regime are likely to
become costlier at standard rate of 17-18%. 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:
Banks provide services to customers who are mobile not only pan-India but international as
well. 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 (Ex: Cheque book, Loans, Statements etc.) A
customer having his account in Bengaluru may during his vacation in J&K transfer funds by
mobile/net banking to somebody in Hyderabad. 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.
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.
Several services by bank to a customer are centralized (Ex: Demat Account, Wealth
Management services, bigger home loans etc.) while several others are localized (Ex:
Savings account, Personal loan, OD etc.). As is evident these complexities add to compliance
costs due to multiple assessments and audits. Clarity on single/multiple ISD registration for
distributing inputs across multiple states is needed.

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.
Complying with the requirements of reverse charge and partial reverse charge mechanism
would add to further compliance costs.

At present, service tax at the rate of 14% is levied on services offered by banks. However, the
final GST rate is expected to be much higher than this if not as high as the initial rate of 27%
the GST regime should have a dual rate structure low GST rate of approximately 12 per
cent on essential commodities, and standard GST rate of approximately 18 per cent on other
goods. That apart, it is expected that there may be a higher GST rate of approximately 40
per cent on a few demerit goods (like tobacco, aerated beverages, etc.), lower GST rate of
approximately 2 per cent on bullions, and exemption from GST on a few select goods. Over
and above GST, there is a proposal to levy 1 per cent additional tax on all interstate supply of
goods, which is non creditable and will be retained by the selling state.
With GST, there will be a significant shift from origin-based taxation to a destination-based
tax structure impacting not only the operating business models but also the revenues of the
centre/states. The proposed levy of an additional 1 per cent origin-based non creditable tax
on the interstate supply of goods is a deviation from the destination-based taxation system.
GST has the potential to impact cash flow, pricing, working capital, supply chain and IT
systems and hence provides an opportunity to transform your business.
Potential benefits of GST:
Smooth credit mechanism by decreasing the cascading effect of multiple indirect taxes.
Broadening of the tax base with reductions in exemptions/concessions.
Creation of a unified common market.
Simplified/uniform tax compliance and administration across India.

Financial services
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.
GST may make things cumbersome as financial service providers may be
required to adhere to compliances across multiple states instead of the current
single, centralised registration compliances.
Also, as GST is a destination-based tax, it might be a challenge to determine
the destination of certain services (at present, services are taxed at the place of
rendering the service). This may lead to a difficulty in determining state GST,
central GST or inter-state GST on B2B and B2C transactions.
Interest on loans, trading in securities, foreign currency and retail services are
also expected to fall within the ambit of GST. Recommendations by the
banking industry suggest that such services and income should not come
under GST. It is still to be seen whether these recommendations will be
Overall, it appears that imposing GST on banking and financial services may
become a challenge and India, if successful, will chart a new course, which
could well become a model for the rest of the world.
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