Prakhar Softech Services Ltd.
Article Dated 05th January, 2024

Exemption on Banking related Services under GST

Entry No 27:

Services by way of—

  • 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);

  • inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers.

Analysis of this entry:

The provided text explains the scope of services falling under the category of "Services by way of extending deposits, loans, or advances" for which the consideration is represented by interest or discount. Here are the key points:

  1. This entry covers services involving the extension of deposits, loans, or advances, where the consideration is in the form of interest or discount.

  2. The terms "deposits, loans, or advances" are interpreted in a broad or generic sense. It includes any arrangement where money is lent, used, or retained, and the borrower pays for the time value of money, represented by interest or discount.

  3. The entry does not cover investments made in the form of equity or any other manner where the investor is entitled to a share of profit. It specifically focuses on lending money and the associated interest or discount.

  4. Interest, in this context, refers to amounts payable in any manner concerning borrowed money or incurred debt. This includes deposits, claims, or similar rights or obligations. However, it does not include service fees or other charges related to borrowed money or unused credit facilities.

Some more points to be noted:

  • Invoice/cheque discounting covered under this entry to the extent of discount. Although service charges, fees, etc., beyond interest are liable to GST.

  • Late payment charges for brokerage/settlement obligations exempt from GST.

  • Collateralized Borrowing and Lending Obligations (CBLO) transactions: In CBLO transaction, the borrowing bank pays an amount as consideration to the lending bank for funds provided by it for a short term. Such amount would qualify as `consideration represented by way of interest or discount` and hence, would exempt from GST under Entry 27.

  • However, if any charges or fees are levied for such transactions, the same would be a consideration and would be liable to GST.

  • Repos and reverse repos treated as loans and deposits, therefore exempt from GST.

  • Income from Commercial Papers or Certificate of Deposits are considered as mere transaction in money, hence exempt. Although any service, fees, etc., charges are liable to GST.

  • Assignment or sale of debts taxable if related to lottery, betting, or gambling; charges liable to GST.

  • Interest on debt instruments exempt from GST as they are in nature of loan.

  • In the case of a financial lease, the ownership of the asset remains with the bank. Essentially, it can be seen as a transaction where the bank purchases the asset and then lends it further and the services provided are not solely in the nature of extending loans, and the consideration for a financial lease is not purely characterized as interest. Consequently, interest on finance lease transactions is subject to GST.

  • In case of takeover of loans by another bank, GST is payable on processing fees, but not on interest.

  • Interchange fees on card settlement liable to GST.

  • Securitized assets are in the nature of securities and hence are not subject to GST.

Circular No. 102/21/2019 dated 28.06.2019

The Central Board of Indirect Taxes and Customs (CBIC) has issued a clarification on the applicability of Goods and Services Tax (GST) to delayed payment charges for Equated Monthly Instalments (EMI). This clarification addresses concerns raised by the trade and industry regarding whether additional/penal interest on overdue loans is exempt from GST or treated as consideration for liquidated damages.

The key points from the clarification are as follows:

Numerous representations were received concerning the GST applicability on delayed payment charges for EMIs.

Two prevalent transaction options involving EMI are discussed. In Case 1, it involves the sale of goods with an option for installment payments and additional/penal interest for delayed payments. Case 2 involves the sale of goods with an option for a loan, and additional/penal interest is charged for any delay in repayment.

Sub-section (2) of section 15 of the CGST Act includes "interest or late fee or penalty for delayed payment" in the value of supply. Notification No. 12/2017 exempts services related to extending deposits, loans, or advances, where the consideration is represented by interest or discount.

For Case 1, penal interest is included in the value of supply, and it is taxable irrespective of the invoicing method. This is because the transaction is for the supply of taxable goods, and penal interest is part of the good`s value.

For Case 2, penal interest charged on a transaction between the buyer and the loan provider is not subject to GST. The transaction falls under the exemption of notification No. 12/2017, and the value of supply is only the cost of the mobile.

The transaction of levying additional/penal interest does not fall under Schedule II entry 5(e) ("agreeing to the obligation to refrain from an act..."). Additional/penal interest satisfies the definition of "interest" as per the notification.

Any service fee/charge by the loan provider related to extending deposits, loans, or advances does not qualify as interest and is not exempt.

Suitable trade notices are requested to publicize the circular`s content, and any difficulty in implementation should be brought to the notice of the Board.The circular aims to provide uniformity in the interpretation and implementation of GST provisions related to delayed payment charges on EMIs.

Entry No 27A:

Services provided by a Banking company to Basic Saving Bank Deposit  account holders under Pradhan Mantri Jan Dhan Yojana (PMJDY).

Entry No 34:

This entry in the GST framework pertains to services provided by an acquiring bank in relation to the settlement of an amount up to Rs.2,000 in a single transaction conducted through credit cards, debit cards, charge cards, or other payment card services. The term "acquiring bank" is defined as any Banking company, financial institution (including non-banking financial companies), or any other entity that makes payments to individuals or businesses that accept such payment cards.

In simpler terms, this provision exempts GST on the services offered by acquiring banks for transactions up to Rs.2,000 through various payment cards. The aim is to provide a relief or exemption for small transactions, making it more accessible and beneficial for both consumers and businesses involved in such transactions.

Entry No 39:

Under Entry 39, GST exemption is granted to services provided by Business Facilitator/Business Correspondent to a Banking company related to accounts in its Rural area branch. Additionally, services provided by any person as an intermediary to a Business Facilitator / Business Correspondent concerning these services are exempt from GST. Similarly, services provided by Business Facilitator / Business Correspondent to an Insurance company in a Rural area also qualify for exemption.

It`s crucial to note that for GST exemption under this entry, services provided by a Business Facilitator / Business Correspondent to a Banking company must be related to accounts in a branch located in the rural area of the Banking company. If the services fall outside this scope, GST is applicable.

The liability to pay GST under Reverse charge for commission/fees on taxable services provided by Business Facilitator to a Banking company rests with the Banking company. The Banking company is responsible for collecting reasonable service charges from customers for services rendered transparently by Business Correspondents.

Definitions under this entry include:

  • Insurance company: A company engaged in life insurance or General insurance business.

  • Intermediary: A broker, agent, or any person facilitating the supply of goods, services, or securities between two or more persons, excluding those supplying on their own account.

  • Rural area: Defined as village areas in land revenue records, excluding areas under municipal committees, corporations, town area committees, cantonment boards, or notified area committees.

The Exemption Notification defines Business Facilitator / Business Correspondent as an intermediary appointed under the Business Facilitator model or Business Correspondent model by a Banking company or an Insurance company following RBI guidelines.

Circular No. 86/05/2019 dated 01.01.2019:

Issue 1: Clarification on the Value of Services by BF/BC to a Banking company:

As per RBI guidelines, banks may pay a reasonable commission/fee to Business Correspondents (BCs), which is periodically reviewed. The agreements explicitly prohibit BCs from directly charging fees to customers. Banks, however, are permitted to transparently collect reasonable service charges from customers. In the Business Facilitator (BF) model or Business Correspondent model, the Banking company is considered the service provider as per RBI guidelines. The Banking company is liable to pay GST on the entire value of service charges or fees, whether received via BF or BC.

Issue 2: Clarification on the Scope of Services by BF/BC to a Banking company in Rural areas:

The scope of exemption under Sl. No. 39 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 is clarified regarding services provided by BF/BC in relation to "accounts in its rural area branch." To avail GST exemption, conditions from the notification must be satisfied. The services provided by BF/BC to a Banking company should fall under Heading 9971 and relate to accounts in a branch located in the rural area of the Banking company. The classification of a bank branch as located in a Rural area and the services permissible for BF/BC are governed by RBI guidelines, and the classification adopted by the bank in accordance with RBI guidelines should be accepted.

CA Pranay Jain is a young and aspiring Chartered accountant. He qualified Chartered Accountancy Course in 2021 and has a well-established practice in various fields of taxation and auditing, with his core area of practice being in the field of litigation i.e., handling assessment and appeal-related matters and representing assesses before various tax departments.

He is also socially active on LinkedIn at linkedin.com/in/capranayjain

CA Pranay Jain
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