29.04.2022: GST on Banking & Financial Sector – A Case Study

GST on Banking & Financial Sector – A Case Study

In India, banking sector is one of the largest service sectors. It plays an important role in generating revenue in our economy. It also plays an important role in the financial life of a business. Implementation of GST is challenging specifically for this sector due to the higher rates as compared to the previous service tax rate mechanism. There is a lot of confusion about how banking sector should charge their customers. Intra-state and inter-state transactions will also become a cumbersome task for the bank.

Let us understand the same with a detailed Case Study.

Case Study

ABC Ltd. is a systemically important non-deposit taking listed NBFC classified as “Infrastructure Finance Company (IFC)” by RBI. It is engaged in the business of making investments and providing financing solutions to companies with projects in the power sector and related areas across the entire energy value chain.

It also has a windmill in Jaisalmer (the state of Rajasthan), the outward supply from which is electricity which is exempt under Notification No. 12/2017- Central Tax (Rate) dated 28.06.2017.Therefore, there is no registration for that state and sale of power takes place through the Delhi Registration.

Particulars Debit Credit
Income
Interest revenue <=1yr          1,25,00,000.00
Additional Interest revenue >5yr              18,50,000.00
Interest from Bank deposits-FDRs              10,50,000.00
Application Fees             50,00,000.00
Consultancy Fees             40,00,000.00
Foreclosure Fees             60,00,000.00
Income from Sale of Power-Windmill              12,50,000.00
Intt on Employee Loan                4,50,000.00
Sale of fixed asset                     3,500.00
Restaurent Services-Lunch facility provided to Employee                    10,500.00
Expenses
Renting of vehicles                 90,000.00
Legal Charges              9,95,000.00
Committee Meeting Fee-Conveyance                  45,000.00
Director Sitting Fees              3,60,000.00
Salary to Staff and directors              4,50,000.00
Hotel Charges              1,00,000.00
Repair & Maintenance-P&M(Windmill)            14,50,000.00

Remarks:

1.The company has a policy of selling the fixed asset at 10% of acquisition cost. Open market value on the date of sale is 7,500.

2. The company charges employees for the lunch facility.

3.Renting of vehicles include Rs.30000/- received from other than body corporate and cost of fuel is included in the consideration charged.

4. Mr. M went for a business trip to Vietnam, wherein he stayed for 5 days in Pullman Danang Beach Resort. The company booked the stay from xyz.com(registered office in India). The hotel charges do not include meals.

Questions:

1.Calculate Taxable Supplies.

2. Calculate Tax payable (Outward & RCM)

3. Calculate ITC (RCM & Other)

4.Blocked Credit, if any.

Answer:

1.Calculation of Taxable Supplies:-

Computation of Taxable Income& Tax
Particulars Taxable Value       Tax @ 18%       Remarks
Interest revenue <=1Yr           1,25,00,000                            0          Note 1
Additional interest income>5yr              18,50,000                            0          Note 1
Interest from bank deposit-FDRs              10,50,000                            0          Note 1
Interest on employee loan                4,50,000                            0          Note 1
Income from sale of power -Windmill               12,50,000                            0          Note 2
Sale of Fixed assets                       3,500                       630
Application Fees              50,00,000              9,00,000
Foreclosure Fees             60,00,000            10,80,000
Consultancy Fees             40,00,000              7,20,000
Particulars Taxable Value          Tax @ 5%       Remarks
Restaurant services-Lunch facility provided to employee                   10,500                       525

Note 1: As per  . 27(a) of N.N-12/2017 Central Tax(Rate) dated 28th June,2017, the tax rate for following service is nil, namely;

Services by way of—

 (a) 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);

Therefore, interest income on loan or advances falls under the category of exempt supply in GST.

Note 2: As per SI. No. 104 of N.N. 2/2017 Central Tax(Rate) dated 28th June,2017, the following goods are exempt, namely;

Electrical Energy

Therefore, sale of energy by windmill falls under the category of exempt supply in GST.

  1. Computation of Tax payable

On outward supplies-

=Rs.630+Rs.27,00,000+Rs.525= Rs.27,01,155/-

Under RCM

Computation of Tax payable under RCM
Particulars Taxable Value Tax Remarks
Renting of vehicle             30,000                1,500 Note 3
Legal Charges 9,95,000 1,79,100 Note 4
Committee meeting Fee-Conveyance             45,000                8,100 Note 4
Director Sitting Fees          3,60,000             64,800 Note 4

Note 3

As per N.N-22/2019 dated 30th Sept,2019, Serial no. 15 has been inserted under RCM notification related to services of renting of motor vehicles by other than body corporate to body corporate tax as per this Notification is payable under RCM @5%. The words of Notification as below-

Services provided by way of renting of a motor vehicle provided to a body corporate.

Any person other than a body corporate, paying central tax at the rate of 2.5% on renting of motor vehicles with input tax credit only of input service in the same line of business

Further this notification has been amended by N.N-29/2019 dated 31st Dec,2019

Services provided by way of renting of any motor vehicle designed to carry passengers where the cost of fuel is included in the consideration charged from the service recipient, provided to a body corporate.

Any person, other than a body corporate who supplies the service to a body corporate and does not issue an invoice charging central tax at the rate of 6 per cent. to the service recipient.

Therefore, obtaining an understanding of the above notifications, tax shall be paid under reverse charge on vehicles rented from person other than body corporate and the rate of tax shall be 2.5% central tax.

Note 4

N.N-13/2017 dated 28th June,2017 amended by various notification issued time to time states that-

As per SI.No. 2 Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity.

Therefore, legal services is covered under RCM as per above notification.

 As per SI.No. 6Services supplied by a director of a company or a body corporate to the said company or the body corporate.

Therefore, Director Sitting fee and committee meeting fee conveyance covered under RCM.

  1. Calculation of ITC:-
Computation of ITC Amount (in INR)
RCM (A) 2,52,000
legal & Professional fee charges 1,79,100
Committee meeting Fee-Conveyance 8,100
Director Sitting Fees 64,800
Other Than RCM (B) 36,090
Repair & Maintenance-Others 18,090
Hotel Charges 18,000 *
Total (A+B) 2,88,090
Eligible ITC Restricted to 50% as per Sec 17(4) of CGSTAct,2017 (Note 5) 1,44,045

*As per the provision of Sec12(3) of IGST Act’17, the place of supply of services, by way of lodging accommodation by a hotel, inn, guest house, home stay, club or campsite, by whatever name called, and including a house boat or any other vessel shall be the location at which the immovable property or boat or vessel, as the case may be, is located or intended to be located.

Provided that if the location of the immovable property or boat or vessel is located or intended to be located outside India, the place of supply shall be the location of the recipient.

Thus, since the resort is outside India, the place of supply shall be location of recipient i.e. location of ABC Ltd. And shall be levied under GST provisions because place of supplier is also in India. Thus, ITC is available.

Note 5

Section 17(4) of CGST Act, 2017 states that

A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of sub-section (2) of section 17, or avail of, every month, an amount equal to fifty per cent. of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse:

         Provided further that the restriction of fifty per cent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.

Thus, ABC Ltd. Avails option provided in Sec17(4) by availing 50% of eligible ITC on inputs, capital goods and input services in case of banking company and financial institution including non- banking financial institution.

4.Blocked Credit

  • ITC on Repair & Maintenance of P&M(Windmill)

Section 17(5) of CGST Act, 2017 states that input tax credit shall not be allowed in following cases

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation—For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Explanation— The expression “plant and machinery”

means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes—

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.

In the given case repair & maintenance services though used for Plant and machinery, does not qualify for availment because it is used for exempt supply i.e supply of energy by windmill which is exempt as per N.N-2/2017, therefore ITC of input services used is not allowed.

  • ITC on Renting of Vehicle

Section 17(5) of CGST Act, 2017 states that input tax credit shall not be allowed in respect of followings-

(b) the following supply of goods or services or both—

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

Thus, ITC on renting of vehicles is blocked.

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