NATIONAL LAW UNIVERSITY ODISHA

INDIRECT TAXATION
4th Year, VII Semester

PROJECT ON: THE LINKAGE BETWEEN GST AND BANKING SECTOR

SUBMITTED TO:
Dr. Priyanka Anand
(Assistant Professor of Law)
&
Ms. Megha Sadhu
(Research Associate cum Teaching Assistant)

SUBMITTED BY:
Jatin Yadav (2017/BA.LLB/046)
 TABLE OF CONTENTS

INTRODUCTION......................................................................................................................3
RESEARCH METHODOLOGY...............................................................................................4
1. Research Objectives........................................................................................................4
2. Research Questions.........................................................................................................4
3. Statement of Problem......................................................................................................5
IMPLEMENTATION OF GST IN THE BANKING SECTOR................................................5
1. Rise in the in the degree of compliance..........................................................................6
2. The importance in determining the place of supply under the GST regime...................6
3. Widening of the term “services”.....................................................................................6
4. The applicable rate of GST payment..............................................................................7
5. The total turnover of the Input Tax Credit on Capital Goods.........................................7
EFFECT OF GST ON SPECIFIC SERVICES..........................................................................9
1. LOANS...........................................................................................................................9
i. PERSONAL LOANS................................................................................................10
ii. AUTO LOANS..........................................................................................................11
iii. HOME LOANS.....................................................................................................11
2. THE CREDIT CARD USAGE.....................................................................................12
IMPACT OF GST ON DISHONOUR OF CHEQUES...........................................................13
THE ROLE OF THE RESERVE BANK OF INDIA UNDER GST PAYMENT..................15
CONCLUSION........................................................................................................................17

INTRODUCTION
Banking is one of the largest and most reputed service sectors in India, thus modelling it to be
as tax friendly as possible becomes quite challenging. The banking sector contributed $407
billion (19% of GDP) and employed 5.5 million people (1% of the workforce) in 2016. With
the sudden implementation of the Goods and Services Act, 2016, the 101st amendment to the
Constitution of India, higher tax rates have been levied on the banking and financial services
under GST than during the previous structure that consisted of VAT and service tax. Service
tax is an indirect tax and Central Board for Excise and Customs (CBEC) is responsible for
levying taxes.
A vast amount of services is provided by the banking sector like Demat account, personal
account, savings account, home loans, wealth management account, ATM, debit cards, credit
cards, cheque clearance, etc. However, not all of these services are taxed. The tax base in the
banking sector has increased because of the increase in the range of the taxable services by
the banks post-GST. The services rendered by the banks are currently taxed at 18% while it
was taxed at 14.5% previously. Activities carried out by the banks that were exempt from
service taxation such as the fund-based activities like savings bank account and loans
disbursed are liable to be taxed under GST and are even expected to become costlier unless
they are explicitly exempted. The banks, in addition, have the opportunity to set-off their
liabilities against credit received on the purchase of goods which would allow the resultant
savings to ensue to the end customer.
Charges such as cheque return charges, minimum balance violation charges and charges for
non-maintenance of Quarterly average balance (QAB) that the bank receives which are
considered to be recovery costs of maintaining accounts, cannot be characterized as a penalty.
Therefore, such services are liable to be taxed under the GST.
It is estimated that the service sectors are accountable to India‟s GVA at 53%, and the
financial sector is a major contributor. Other countries like Australia, Singapore, New
Zealand, etc., have mostly allowed exemption for financial sectors from GST. Therefore, it is
necessary for the financial sector to come up with strategies to retain its position as a major
contributor to the Indian service sector. With the advent of GST a banks and NBFCs need to
make complete overhaul of its operations, accounting, compliance and transactions.

RESEARCH METHODOLOGY
RESEARCH OBJECTIVES
1. To examine the implementation of Goods and Services Tax on the banking sector
2. To study the impact of the GST on the services that are rendered by the banks and to
examine the changes brought in the day to day workings of the banks because of it.
3. To determine whether the changes brought by the GST, were really necessary or not.
4. To analyze the role of the Reserve Bank of India in the compliance of GST.
5. To analyze and find out whether the changes that were brought by this tax regime
were favourable on the banking sector in India or not.

RESEARCH QUESTIONS
1. How has GST been implemented in the Banking Sector?
2. What has been the impact of GST on the services rendered and the changes brought to
the working of the banks?
3. Was the GST really necessary and was it favourable for the better functioning of the
Banking Sector?
4. What role does RBI play regarding the compliance of the GST?
5. Is the GST favourable for a better functioning of the banking sector in India?

STATEMENT OF PROBLEM
The project seeks to identify the various changes and reforms that have been brought about
by the GST regime particularly in the Banking Sector and how the same is applicable to the
Banking sector as a whole. It also undertakes to find the role of RBI and Banks in terms of
compliance to the GST system. After the implementation of GST, this tax regime subsumes
various types of indirect taxes that prevailed in the country and seeks to eliminate cascading
effects of taxes and double counting problem. GST is more than just a tax change. It is also a
‘behaviour change’ and its implementation has made our nation adapt to the new
requirements of doing business. With a hike in GST rates to 18% from the 15%, the banking
sector services have become more expensive after July 1. The present study is intended to
find out the impact of GST on Banking sector. This project will examine the changes that
have been brought into by the Goods and Services Tax on the tax levied on the banking
sector. The author shall be looking into the question of whether the changes that have been
brought with the GST implementation have been favourable for the functioning of the
banking sector in India. The author will also try to give a general overview of the functioning
of RBI and the Banks.

IMPLEMENTATION OF GST IN THE BANKING SECTOR

The banking sector is known to be one of the largest service sectors in India, and therefore, it
is expected that GST will impact heavily on the working of the Indian banking system. The
major challenges that the banking sector would face with the introduction of GST are –
firstly, the banks will be hit by significantly higher tax rates under the GST as compared to
the previous service tax rates. Secondly, banks might come across hindrances in their
working due to their vast geographical reach.1 The Indian banking system needs to brace
itself to take on the new tax regime under GST months after demonetization. The Indian
banking sector must take note of critical implications in order to devise strategies to
efficiently implement GST.

RISE IN THE DEGREE OF COMPLIANCE

GST as a tax regime runs parallel to the usual taxation system in which both the state and the
Centre tax the assesses in one go. Therefore, it becomes necessary for the banks to acquire
state-wise registration in every state that has their branch office. However, in situations when
the bank has multiple branches in a state only a single registration would suffice for all the
branch offices in that particular state.2
Nevertheless, banks usually have a multi-state presence, and as a result the state-wise
registration would prove to be an extremely cumbersome task as it would lead to a substantial
increase in compliance levels. This would pose a huge challenge to the banks with a change
in tax regime as most banks have actually obtained a „centralized‟ registration under the
previous service tax regime.

THE IMPORTANCE IN DETERMINING THE PLACE OF SUPPLY UNDER THE GST REGIME

GST is heavily based on the place of supply. The banks are entrusted with the task of
determination of the place of consumption where the payment of GST will be made. It is a
very burdensome task to determine the place of consumption of GST or the place of supply as
most bank branches are swamped with several commercial transactions, both within and
outside the states.3 IGST will be attracted if goods and services are supplied inter-state
between branches of a bank located in different states. The receiving branch of the bank
would obtain the GST charged as credit.
1
Primax Foundation, Impact of GST,Shanlax International Journal of Commerce, 5 2,
http://www.primaxijcmr.org/wp-content/uploads/2017/11/KLE-Primax-Foundation-Journal.pdf#page=105,
last accessed 1 November 2020.
2
Ibid.
3
Issues in GST on Banking Sector, http://idtc-icai.s3.amazonaws.com/download/knowledgeShare17-
18/Issuesin-GST-on-Banking-Sector.pdf, last accessed 3 November 2020.
It, however, is a very onerous task to track such transactions. There seems to exist enough
scope for wrongly determining the recipient of services. It is possible that assesse may get
caught in legal disputes. Therefore, scholars have suggested that instead of burdening the
taxpayer in determining the place of supply and increasing his risks of getting entangled in
disputes, the GST must provide for an easier mechanism for determination

WIDENING OF THE TERM “SERVICES”

The term “service” has substantially been widened under the GST law bringing interest also
within services that can be made taxable by including a phrase “any other goods” which
covers interest also.4 GST is not levied in other parts of the world since the meaning of
“interest” is debatable as it is yet not clear whether it is time value for money or a
consideration for lending money. Scholars have suggested that the Indian law also must
clarify whether “interest” is outside the ambit of GST. In case the interest does not attract
GST, then the input tax credits claimed by the banks will take a hit.

THE APPLICABLE RATE OF GST PAYMENT

With the advent of GST services are expected to levy 18% GST which makes it 3% higher
than the previous tax rate, thus rendering various banking services such as issue of cheques
and demand drafts more expensive to retail customers in particular. Also, nowadays, banks
deal with commodities such as gold and silver on which a concessional GST is applicable.
Therefore, the banks need to be scrupulous about payment of GST at appropriate applicable
rates on various products.

THE TOTAL TURNOVER OF THE INPUT TAX CREDIT ON CAPITAL GOODS

Rule 6(3B) of CENVAT Credit Rules, 2004 states that an assessee in banking sector has to
reverse 50% of the CENVAT Credit taken on monthly basis on inputs and input services. 5
However, banks can take full credit on Capital goods unless the said capital goods are
exclusively used for any exempted service. However, according to section 17(4) of the GST
law6 states that banks engaged in supplying services by way of accepting deposits, extending
loans or advances have to reverse 50% of the eligible input tax credit on inputs, capital goods
and input services. It is important to understand that even requirement of reversal of standard
50% credit even on the capital goods portion will have negative impact. Various office
furniture, equipment, cash-counting machines, computers, printers, airconditioners etc. are of
high procurement cost for any branch of the bank and if 50% of the credit on the same is to

4
Ibid
5
Rule 6(3B), CENVAT Credit Rules, 2004.
6
Sec 17(4), Goods and Services Tax.
be reversed then it shall have an adverse impact. The GST Act provides for an option that
allows the bankers to reverse 50% of the CENVAT credit instead of reversing based on the
input service partly attributable to the taxable supply and exempted supplies. The previous
service laws also had same kind of provisions, thus, it is advised that departmental notices be
issued that demand to reverse CENVAT credit of input, input services that are only used for
exempted services although the choice for reversal of credit at 50% is selected.
It is, hence suggested to include a particular clause incorporated providing the option to
reverse tax at 50% is chosen, then there must be no conditions imposed over actual
correlation of output services/ goods with input services/goods for the purpose of rejection of
credits. However, if reversal is done on an actual basis, then it is particularly provided that
‘Value’ for the calculation of reversal shall not incorporate the value of service by “extending
deposits, loans or advances” against consideration in the form of ‘interest’ or ‘discount’.
Major revenues of the banks are generated from interest, the reversal of credit on the basis of
actual mechanism would result in redundancy, and banks would naturally elect for 50%
reversal option. This could be very detrimental to the working of the banks since some
genuine situations in which the reversal of credit based on the actual mechanism would have
been beneficial. Therefore, it is suggested to provide this option in line with the present
provisions in the service tax law.

IMPACT ON CUSTOMERS OF THE BANK

Due to the arrival of GST, the tax rate on each and every products and service of the banks
have become expensive and less affordable to the customers. Some of those are as follows:
1. Loans were available at a cheaper rate before the advent of GST, now the rate has
been fixed to 18% which made the customers in pressure and uncertainty that whether
the customer will be able to repay the amount.

2. Debit card and a Credit card is one of the common instruments used by the customers
nowadays, the tax charged on these instruments is 18% which is costlier than the
previous rate which was 15%.

3. Investments like mutual funds are negatively affected by GST. the customers are in
great strain that the cost incurred by the investments banks are very high and the tax
charged on these investments is 18% which is very much higher for the customers to
afford and mutual funds are largely based up to the total expense ratio which has gone
up by 3% after the initiation of GST.
4. Increase in the premium caused a large number of the customer to withdraw the
insurance policy people with low income cannot afford the premium charged under
GST.

5. Banking facilities like locker facilities, tax payment, billing, and shopping etc. are
widely used by the customer. It was charged at a rate of 15% and now it has changed
to 18%. Even though it is expensive customers with large assets always maintain a
locker system for their safety purpose.
 EFFECT OF GST ON SPECIFIC SERVICES

Some of the banking services impacted by GST are loans, lease, hire-purchase transactions
and cheques. Lease may both be supply of services or supply of goods in financial sectors
that may attract GST at the same rate as the assets that are leased out. A hire purchase
transaction includes a hirer who provides an asset for use on hire rental basis and a right to
acquire that asset at the end of the hiring tenure at a nominal rate. 7 This transaction will,
therefore, be charged at the same rate at which a hired asset is charged under GST.

LOANS
Loans are money to money transactions, and they are not subject to GST. Interests charged
on loans are also exempt from GST. Popular kinds of loans include personal loans, home
loans, car loans, business loans etc., and with the 3% increase in tax rates, loans also have
become costlier. When we say that GST is applicable on the loan transactions, we need to see
the definition of the goods and services as given in the CGST Act. The definition clearly
states that mere money is excluded from both ‘goods’ and ‘services’. However, section 2
(102) includes, in the definition of “service”, any activity relating to the use of money, even
though supply of money itself is not a service.8

In the case of Delhi Chit Fund Association v. Union of India 9 where the court stated that
whether loans are “supply” or not becomes important as if we don’t include loans under the
definition of services then how can they be exempt services under Item 8 of Exemption List.
Thus, court stated that if the transaction does not fit into the meaning of “loan”, “deposit” or
“advance”, even if the transaction is intrinsically a financial transaction, it does not seem that
the supply will be exempt from GST. Thus, if an inventory repurchase transaction or a
financial lease transaction may have the substance of a financial transaction, but it will be
difficult to contend that they avail the exemption given in Item 8 of the Exemption list.
Nevertheless, if the transaction is a loan transaction, there is no question of GST on the
recovery of principal lent, as the tax can only be on the consideration, and not for principal
recovery. Also, the question that whether money lending is itself a supply of service at all,

7
Sony Pandey, H & R Block, Impact of GST on Banks and NBFCs in India, 28 January 2019,
https://www.hrblock.in/blog/impact-of-gst-on-banks-and-nbfcs-in-india/, last accessed 3 November 2020.
8
Central Goods and Services Tax Act 2017, s 2 (102)
9
Delhi Chit Fund Association v. Union of India Writ Petition No. 4512/2012, Delhi HC
will be open for discussion before the respected Courts.10

i. PERSONAL LOANS

GST will impact all loan sectors however the Personal loans will be impacted the most
because it is quite multipurpose and it does not necessitate of being collateral except in few
cases. Personal loans are inclusive of service taxes such as processing fee and prepayment
charges. In the pre-GST period, the prepayment carries a charge at 2%-5% of the outstanding
loan plus service tax. So, if the outstanding loan is ₹2 lakhs, the prepayment charge would be
4,000-10,000+15% service tax17, this has now become 18%. So, we see that the service tax
at the rate of 15% would have been less in comparison to the post GST, which will be
increasing now. Thus, there is a significant increase in attaining the personal loan; however,
the liability of these increasing costs is not that high on the debtor. This is very reason
because of which the personal loans are easy to get and considered as a popular option for
finance.11

ii. AUTO LOANS

Automobile industry is facing huge losses this year, earlier affordable and accessible auto
loans for individuals as well as corporate were the main contributors to the growth on vehicle
sales in the country but the introduction of GST has changed the same. The financing
company earns interest by financing for vehicles which are exempted from the levy of GST,
however GST will be levied on various charges recovered by the financing company from the
borrower during the tenure of loan agreement. This will ultimately increase the acquisition
cost of the vehicle for the borrower because the GST rates on such charges are higher.

The financing companies also have other alternatives of finances like leasing of vehicles. The
rate of GST on such transactions is linked to the rates of GST on the vehicle. The impending
increase in the rates of GST can lead to substantial increase in lease rentals by the financing
company. In addition to this, the ITC restrictions on the financing company will have an
impact on the effective cost which in turn will lead to higher IRR while planning their leasing

10
Taxmann, “GST on Loan Transactions” (2017) 47 Chartered Secretary 07, 1-128
11
Athulya, „Impact of GST on Personal Loans‟ VS (3 November 2020)
products.12

Also, when GST will be levied on the sale of vehicles repossessed by the finance company, it
will impact the net realization for both the company and borrower on account of high rate of
GST on vehicles, leading to decreased margins and double taxation. Thus, GST can have an
impact on the financing business from the aspect of product designing, cost of financing and
the margins.

iii. HOME LOANS

The impact of GST on home loans is a bit dicey as a lot of provisions on it is still unclear.
After GST floating home loans, no charge is borne on prepayment. The fixed rate home loan,
on the other hand, used to be charged at 2%-3% of principal outstanding plus service tax at
15%. Post-GST, it will be 2%-3% of principal outstanding+18%. The GST Council has
decided to reduce the GST on housing schemes that are affordable from 12% to 8% which
basically implies that if someone is purchasing an Under Construction property, and is
eligible for PMAY, he or she shall be made liable to a concessional GST on the property.
Concession granted is 4%. Further, on an event of non-eligibility to get PMAY subsidy on
home loan then even the concessional GST may not be claimed. Complete 12% is levied. 13
Example: The processing fee on home loans is 0.25% to 1% of the loan amount. So on a loan
of Rs. 50 lakhs, the processing fees would be Rs. 12, 500 (assuming 0.25%). Earlier Service
tax @ 15% is Rs. 1875 but now GST @18% is Rs. 2250 which will be levied. So there is an
increase of Rs. 375.

iv. THE CREDIT CARD USAGE

This has also become expensive due to imposition of GST. When the credit card will be
swiped, the service tax will be incurred. The late payments of credit card will also attract
additional taxes.14 The interest involved in credit cards is also not a fully exempt service. So,
A credit card bill displays the total amount as well as the minimum amount payable, so most
12
MS Mani and Sandeep Gupta, „GST Impact: What happens to Auto Loans from July 1‟ Economic Times (18
June 2017)
13
ibid.
14
Impact Of GST While Availing A Loan - Antworks Money' (Antworks Money - The Blog on Personal
Finance | Guide to Loans, Credit Cards, Insurance and Investments, 2019)
<https://www.antworksmoney.com/blog/impact-gst-availing-loan/> accessed 3 November 2020.
people pay only the minimal amount; this attracts huge debt. Heavy interest charges will also
be applicable in case of delay.15

However, there will be instances when there will be no occasions when there are no service
or processing fee. The GST will not be applicable in case of payment of utility bills using
credit cards. This is because even in the pre-GST era, the service tax was not levied on
payments made towards utility bills through credit cards. Before GST, the Service Tax levied
on credit card-related services was 15 per cent. After GST, this increased by 3 per cent and
the credit You should be aware that after GST, interest or late payment charged would be
taxed at a higher rate. Thus, all the luxury items will become expensive and all the other
necessary items will remain cheap.

IMPACT OF GST ON DISHONOUR OF CHEQUES

15
Adhil Shetty, “Five Credit Charges You Should Know About” Business Today (15 May 2018).
With the implementation of GST, there arose a dispute whether charge collected by a party
on the dishonour of a cheque was held to come under the shadow of GST. The charge
collected by a party on the dishonour of a cheque was held to come under supply of services
under GST in the case of –
 In Re Bajaj Finance Limited (Gst AAR Maharashtra)16
Facts:
The parties had an agreement providing for repayment of the loan vide cheque. In case of
dishonour of cheque the Applicant collects bounce charges, which is in line with the agreed
terms and conditions of the agreement. The bounce charges are generally a fixed amount per
default committed by the customer, for e.g. Rs.350/- for each dishonour of cheque.The
Applicant is of the view that such bounce charges collected, are in the nature of penalty/
liquidated damages and therefore, the same is not a consideration for supply of service and
hence, not be subjected to GST levy.17 While submitting that the Applicant is of the view that
penal interest collected from the customer is in the nature of additional interest, and therefore,
the same is not subjected to GST levy, the applicant has reproduced the relevant extract of
clauses of a sample auto loan agreement in respect of penal interest which is as follow:

“Bounce Charges” shall mean, dishonour of post-dated cheque entrusted by the borrower for
clearance of EMI (monthly installments) or non-payment of installment on or before
respective due date for other modes.

Terms of the loan:-The Borrower agrees and confirms that BFL is entitled to levy penalty as
follows on default and the bounce charges of up to Rs.350/- on each Bounce.

A perusal of the above extract reproduced by the applicant in support of their argument that
Bounce Charges, collected by them is in the nature of penalty, reveals that while drafting the
agreement they themselves have defined “Bounce Charges” as charges for dishonour of
postdated cheques. Such bounce charges are collected by them from their customers for the
reason that the said customers have dishonoured the cheques issued by them towards
payments of EMI and the applicant has tolerated the said act of their customers of
dishonouring of cheques.
16
2019[27] G.S.T.L. 628
17
Shirir Sinha, “Cheque bounce charges attract GST, rules AAR” The Hindu(New Delhi, 31 July 2019).
Issue:
Whether the act of bearing the delay and continuing with course of business with the same
party qualify as a supply of service?
Supply as defined under Section 7(1)(d) of the GST Act says – “the activities to be treated as
a supply of good or supply of services as referred in the schedule 2”18 and schedule 2 clause 5
sub-clause (e) says “agreeing to the obligation to refrain from an act, or to tolerate an act or a
situation, or to do an act”

Held:
“In the present case, there is a clear understanding or agreement between the parties to foresee
and tolerate an act or a situation of default on the part of the client for a monetary
consideration which is actually a consideration received by the applicant, though in the
agreement they may be giving this consideration, other names such as “penal charges”,
penalty, Bounce Charges, etc, as thought proper by them, but these different nomenclatures in
their Agreement would in no way change the actual nature of monetary “consideration”
which would clearly be taxable for the supply of services.”

Also, the exemption for financial transactions under GST laws is only in respect of the
interest/discount earned or paid for loans, deposits or advances. If the transaction, as in the
subject case deviates from the above, i.e. the consideration not being an interest or discount,
the exemption is not available.

THE ROLE OF THE RESERVE BANK OF INDIA UNDER GST PAYMENT

18
Central Goods And Services Tax Act 2017, s 7(1)(d).
RBI performs certain functions after it receives remittances. RBI has to receive and validate
the NEFT/RTGS transaction against the Challan details received by it. It then has to
communicate the receipt of payment (CIN) to GSTN on real time basis. On first day of every
month, RBI as e-FPB will provide Datewise Monthly Statements (DMS) for each tax and
government separately the details including the name of tax, government name, Date wise
number of successful transactions and total credit reported to RBI, and the list of
discrepancies remaining unresolved at the end of the report month (MOE UIN, CIN, BRN,
Amount, Nature of discrepancy).19

The data received from GSTN portal should not require any fresh data entry and should not
be allowed an opportunity for modification. A functional integration also must exist with the
GSTN portal for both modes. The IT system should have the ability to receive challan data
and to communicate successful remittances on real time basis to GSTN portal for both
modes. Three different bank accounts in the name of government of India need to be
maintained one each for CGST, IGST and Additional Tax) and one tax account for each
State/UT Government (36 in total) (for SGST), and they have to be operated by e-FPB only.20

“The tax payer accesses the GST portal and generate e-challan. The GST portal gives a unique
number called Common Portal Identification Number (CPIN). The tax payer can effect
payment through internet banking/debit/credit cards/NEFT/RTGS or download print the
challan in case off Over the Counter (OTC) payment. After receipt of payment, A Challan
Identification Number (CIN) is generated by the respective banks which will be shared with
tax payer and GST portal. The funds are settled by agency banks with RBI along with the
transaction (Challan) details. RBI also accept tax payment directly through NEFT/RTGS.21”

GST AND E-KUBER

The Reserve Bank’s e-Kuber system has been assigned the responsibility of functioning as an
“aggregator” for all-India collections under the Goods and Services Tax (GST) regime. To
19
How to Export Import, Recommended instructions to bank for collecting GST Tax, 14 June 2017,
http://howtoexportimport.com/Recommended-instructions-to-bank-for-collecting-GS-2334.aspx, last accessed
3 November 2020
20
ibid.
21
'Reserve Bank Of India - Frequently Asked Questions' (M.rbi.org.in)
<https://m.rbi.org.in/Scripts/FAQView.aspx?Id=61> accessed 5 November 2020.
develop it into a one-stop source of data reporting, serverto-server integration was established
with central government, all the 36 state governments and union territories, 25 agency banks
and GST Network (GSTN). The Sub-Committee on GST Payment Process, set up by the
Empowered Committee of State Finance Ministers had recommended in April 2015 that the
Reserve Bank‟s e-Kuber system could be designated as an all-India aggregator for GST
collections. Accordingly, the Reserve Bank commissioned and successfully implemented an
end-to-end automated system for flow of taxation data, payments and reporting using ISO
20022 message formats from July 01, 2017. A Service Gateway with advanced security
features has also been implemented for secured exchange of information amongst the
stakeholders, viz., Central Board of Excise & Customs (CBEC), Government of India; all the
36 states and union territories, 25 agency banks and GSTN. The e-Kuber infrastructure has
also been enhanced considerably for handling GST transactions.22 As a result, the GST payers
may now remit the tax directly to the government account/s maintained with the Reserve
Bank, through their banks using NEFT and RTGS. Under NEFT/RTGS mode, credit of tax to
the government account happens directly on the same.

An online reconciliation mechanism for GST transactions, called Memorandum of Errors

(MoE), has been designed in coordination with the CBEC, Government of India. This process
is undergoing testing among all the stakeholders including the Reserve Bank, the GSTN,
agency banks and CBEC. The MoE process would facilitate paperless processing and
resolution of reconciliation issues among the stakeholders with the Reserve Bank‟s e-Kuber
system as the fulcrum.

CONCLUSION

The banking sector, now faces a lot of challenges under the new GST regime in light of

22
(Rbidocs.rbi.org.in2020)
<https://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/9IXPAYMENT5467258C18F0496FA39CA6EA7B2BF9B
9.PDF> accessed 5 November 2020.
transaction, customer profiles, IT systems etc. for capturing both front and back-end data.
This necessitates vigilance on the functioning of IT and the capacity to process high volume
data, in order to be ready for complete GST compliance. GST has awider impact on Banks
and NBFCs alike. Services sector is more affected by GST than the manufacturing/trading
sector. Out of the superset of existing authorized banks and participating banks only those
banks should be authorized to accept GST receipts who meet the minimum requirements. The
goal of these minimal compliance is to ensure that a bank has the capacity to handle GST
receipts in a seamless manner in a consistent and error free manner underpinned by a robust
IT system with no process flow discontinuities. However, deeper analysis reveals that such an
increase in cost should not be considered a negative GST impact on financial services sector.
In the long run, banks will be able to transfer the advantage of input tax credit – enabled
under GST – to the customers. Furthermore, services like fixed deposits (FDs) and other bank
account deposits that were outside the circle of service tax will continue to remain outside the
GST ambit. A major advantage of GST on financial services and other sectors is that it is a
transparent tax and has reduced the number of indirect taxes. It integrates different taxes and
ensures that the tax burden is fairly divided between different entities involved in the system.
Implication of GST on the financial sector, its effect on banks and NBFCs will need to
reorganize its functioning, accounting, compliance and transactions entirely. Moreover, the
IT system will have to be vigilant enough to solve the complexities related to GST
procedures and compliance at a higher volume.