- What is the meaning of financial services?
Financial services have no meaning ascribed to it under the GST regime. However, for the purpose of this write up, by financial services, we mean any supply of goods or services by a person to another person, meant for the purpose of extending credit support. This includes, but is not limited to the following:
- Hire Purchase
- Conditional Sale
- Securitisation/ Assignment of receivables
- Acquisition/ sale of shares and securities
- If a financial institution has offices in various states, is it necessary to register in each and every state or one centralised registration will do?
Section 22 of the CGST Act states – “Every supplier shall be liable to be registered under this Act in the State or Union territory, other than special category States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees”.
There are two options that arise from reading of the above text of law – first, since operations will be carried out from each of the states/ UTs, separate registrations may be obtained, and second, the financial institution can centralise its operations and route all the transactions from one single location, in that case there will be only location of the financial institution and the quantum of taxable supplies of all other locations will fall below the minimum requirement and thus the registration will not arise.
There are pros and cons of each of the two options.
On one hand, if separate registrations are obtained for each of the states/ UTs then whenever there is a transaction among the different branches there will be question of tax on the transaction and applicability of valuation norms as well; plus there will be additional compliance requirements as for each registration obtained regular compliances will have to be carried out separately.
On the other hand if the latter one is followed there will be possibility of losing substantial amount of ITC that may have arrived due to local acquisition of goods and services on each of the states/ UTs in which the financial institution operates. Since there will be no registration in rest of the states, ITC on goods and services locally acquired shall be wasted.
Therefore, one has to assess the amount of implications of each of the two options before deciding which one to choose.
- Are loan transactions are subject to GST?
The definition of goods and supply under sections 2(52) and 2(102) of the CGST Act, exclude money to money transactions. Loan transactions being money to money transactions are therefore not subject to GST.
Further, the GST Council has also exempted money to money transactions in the Schedule of GST rates for services. Entry 8 of the list of exempted services states:
Services by way of— (i) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services); (ii) inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers.
Therefore, interest charged on loan transactions shall not be subject to GST.
Please also see the answer to question 14 below to understand the implications of GST on other charges associated with loan transactions.
- Are lease transactions subject to GST?
As per the provisions of Schedule II of the CGST Act, any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services. In case of a lease transaction, there is a transfer of right to use the asset from the Lessor to the Lessee. Therefore, lease transactions shall be treated as supply of services for the purpose of GST. Further, there is no difference between financial lease and operating leases under the GST regime.
Here it is important to note that some cases of financial leases involve transfer of title of the asset at the end of the tenure; such cases will be treated as supply of goods, because Schedule II of the CGST Act states any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods.
Our detailed FAQs on GST on lease transactions can be viewed at: http://vinodkothari.com/wp-content/uploads/GST-on-Lease-Transactions-FAQs.pdf
- At what rates shall GST be charged on lease transactions?
As per entry 33 of the Schedule of GST rates for services approved by GST, transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration (supply of service) to attract the same GST rate and compensation cess as applicable on supply of similar goods which involves any transfer of title in goods (supply of goods).
Therefore, though leasing will qualify to be supply of service under GST regime, it will attract rates which are assigned to assets that are being leased out.
For instance, if a person takes a car on lease, such a transaction would be subjected to the GST rate that is applicable for car i.e. 28% plus the additional cess, as may be applicable.
- Is it the rate or the base which is same as that of the supply of goods?
The words “same GST rate and compensation cess as applicable on supply of similar goods” distinctly consider the rate which is applicable for the supply of goods. So the same rate of leased goods would apply on the value of consideration approved for leasing.
For example, if motor car is acquired for Rs. 10 lakhs and duty is paid at the rate of 28% on it, i.e., Rs. 2.8 lakhs, that does not necessarily mean that when leased out, the total taxes to be collected under the lease facility shall also amount to Rs. 2.8 lakhs. There is also an interest component in case of lease transactions, GST will be charged on the interest component as well. Therefore, the tax collected on lease transactions shall not be the same as that paid for the acquisition of the assets.
Therefore, it can be concluded that only the rate of tax is same and not the base of taxation.
- Are hire purchase transactions subject to GST?
In a hire purchase transaction, the Owner of the asset gives the Hirer a right to use the assets for a specified on payment of hire rentals and also gives a right to acquire the asset at the end of the tenure at a nominal value. As per Schedule II of the CGST Act states any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods.
Since, in hire purchase the transfer of asset is subject to certain conditions, that is, payment of rentals and nominal value for purchase of asset, the same will be treated as supply of goods for the purpose of GST.
- What would be rate at which the hire purchase transactions be taxed?
As per entry 35 of the Schedule of GST rates for services approved by GST, supply consisting of transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed (supply of goods): value of leasing services shall be included in the value of goods supplied.
In case of hire purchase transactions there is a transfer of title of the assets upon payment of last instalment. Therefore, hire purchase transactions will fall within the ambit of entry 35 of the Schedule and GST rate applicable shall be same as that of the asset/goods so hired. Here again we cannot miss the fact that it is the rate which is same and not the value.
- Is it the asset purchase price on which the GST would be levied on hiring such asset?
Entry No. 35 of the Schedule states – “value of leasing services shall be included in the value of goods supplied”. Here it is important to note that a hire-purchase contract consists of two components:
(a) Asset Cost Price i.e that the price at which the asset is purchased from market; and
(b) Value of leasing charges i.e the hiring charges or mainly the interest component that is so added to the cost price and made available to the hirer.
Therefore the GST rate would be applied on this total value of both the cost and the leasing charges so added.
- Are conditional sale transactions subject to GST?
In a conditional sale, a seller agrees to transfer the asset to the buyer upon fulfilment of certain conditions. Generally, in a conditional sale, the sale proceeds are received over a period of time, and timely payment of instalments are the underlying conditions for the transfer, which means, when all the instalments towards purchase of asset are paid, the asset is transferred to the buyer.
Therefore, based on the similar logic applied in question 4 above, conditional sale transactions shall be treated as supply of goods for the purpose of GST.
If such conditional asset transfer takes the form of hire purchase, rate applicable for such a supply would be same as that mentioned and explained in entry 35 of GST schedule rates for services.
Elsewhere such conditional sale would be subjected to GST residual rate of 18%.
- Are securitisation/ assignment of receivables transactions subject to GST?
Schedule III of the CGST Act provides for list of transactions that neither qualify as supply of service nor as supply of goods. The list includes dealing with actionable claims.
The term “actionable claim” has been defined in the following manner:
(1) “actionable claim” shall have the same meaning as assigned to it in section 3 of the Transfer of Property Act, 1882;
As per section 3 of the Transfer of Property Act, 1882, the term “actionable claim” means:
“actionable claim” means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent;
As is understood from the above reading it is understood that any claim to any debt, other than a secured debt, is actionable claim which shall be exempt from the purview of GST;
Now the question which comes up is about the assignment of secured debts. Will they be subject to GST as against to the existing exemption from tax?
Here it is important to take a note of entry 8 in the list of exemptions provided in the Schedule, which states
Services by way of— (i) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services);
In an assignment of receivables transaction, the acquirer of the receivables gives an advance against the receivables which are to be received over a period of time, at a discount. Therefore, though assignment of the secured debt does not get covered under the definition of actionable claims, we are of the view that they will get covered under entry 8 of the list of exemptions.
- Would the above discussion apply for factoring as well?
Factoring also involves assignment of debt and the factor extends an advance to the originator against receivables that are realisable over a period of time, at discount. Therefore, based on our discussion in question 11 above, we are of the view that factoring shall not be subjected to GST.
- Are acquisition/ sale of securities subject to GST?
The definition of “goods” as per section 2(52) of the CGST Act exclude securities. Therefore acquisition or sale of securities shall not be subject to GST.
- Are processing fees charged by banks/ financial institutions subject to GST?
The term “services” has been defined in the following manner:
(102) “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;
As is evident from the above, services exclude any money to money transaction but includes activities relating to the use of money. Processing fee is charged by a bank/ financial institution for processing a financial transaction, which falls within the meaning of activities relating to use of money. Therefore, processing fees charged will be charged to GST as supply of service.
- In case of those transactions where the taxable financial transactions have already commenced, prior to the effective date of GST implementation, will the transaction be subjected to GST? If so, how?
Taxation of supply of goods or services under GST takes place based on the point of taxation of a transaction. As per section 12 of the CGST Act, the time of supply of services shall be earliest of the following dates:
(a) the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or
(b) the date of provision of service, if the invoice is not issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or
(c) the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause(a) or clause (b) do not apply.
Same rule shall apply in case of existing financial transactions as well. Therefore, if a transaction which happens to be a taxable supply under GST, initiated before the implementation of GST, carries on event after the implementation, the taxation of such transaction shall be carried out on the above manner.
- Can ITC be claimed against inputs acquired for providing financial services products?
There are two ways in which ITC can be claimed by banks and financial institutions under the GST regime:
Proportional ITC method (Section 17(2))
Here the bank/ financial institution shall be able to claim ITC on its inputs only to the extent the same can be attributed towards taxable supplies. The example below would help us to understand:
|ITC that can be claimed||80|
50% ITC method (Section 17(4))
Under this method, the bank/ financial shall be able to claim ITC on its inputs at a flat rate of 50% on all the ITC it has, irrespective whether the inputs have been used for the purpose of taxable supplies or not. The example below would help us to understand:
|ITC that can be claimed||50|
The bank/ financial institution can opt for either of the two, however, once a bank/ financial institution opts for a particular option, it will not be able to change it further during the same financial year.
- What are the conditions necessary for obtaining ITC?
Following four conditions are to be satisfied by the registered taxable person for obtaining ITC:
- he is in possession of tax invoice or debit note or such other tax paying documents as may be prescribed;
- he has received the goods or services or both;
- the supplier has actually paid the tax charged in respect of the supply to the government; and
- he has furnished the return under section 39.
- Does input tax includes tax (CGST/IGST/SGST) paid on input goods, input services and capital goods?
It includes taxes paid on input goods, input services and capital goods. Credit of tax paid on capital goods is permitted to be availed in one instalment.
Input tax credit cannot be availed on the tax component of cost of capital goods, if depreciation has been claimed on the tax component under the Income Tax Act, 1961.
- What will happen to the unabsorbed ITC benefit as on the date of migration?
Under the transitional provisions, i.e., u/s 140(1) of CGST the benefit of the CENVAT credit carried forward in the return can be claimed by the registered person subject to the following conditions:
- The said amount is admissible as ITC under the Act.
- Registered person has furnished all the returns for the period of six months immediately preceding the appointed date.
- Credit does not relate to goods manufactured and cleared under such exemption notifications as are notified by the Government.
It should be noted that ITC shall be available only when such goods are admissible under the existing law and is also admissible in GST.
- In case of change in the constitution of a registered person whether input tax credit shall be allowed to be transferred?
Section 18(3) also covers change due to business combinations like mergers, demergers and amalgamations as well. Therefore, even in case of business combinations, the newly constituted entity will be able to claim unutilised ITC.
- How will cross border transactions be charged under GST?
A cross border lease transaction is a transaction where the Lessor and Lessee are located in two different countries. As per section 12(4) of the IGST Act, where supply of services is imported into the Indian territory, they shall be deemed to in the course of inter-state trade and commerce. Therefore, where the Lessor is located outside India and the Lessee is located in India, the transaction will be subjected to GST under reverse charge mechanism.
However, where the Lessor is located in India and Lessee is located outside India, in such case the place of supply of service shall be outside India and therefore, shall not be subjected to tax under GST law.
- Which entities are liable for payment of TCS?
Tax Collected at source is applicable only to E-Commerce Operator under section 52 of CGST Act. E-Commerce operator shall withhold an amount calculated at the rate not exceeding one percent of the “net value of taxable supplies” made through it where the consideration with respect to such supplies is to be collected by the operator.
- Whether sale of repossessed goods be subject to GST?
Sale of repossessed goods will be covered under sub-section 52 of section 2 CGST Act, 2017 as supply of goods for consideration. These will be taxable at the rate which is assigned to the goods being sold.
The authors of this write up can be contacted at: firstname.lastname@example.org