Banking Sector and GST

By Registrationwala

4th April 2017


In the current scenario, there are around 25 public sector banks and 20 privately operated banks in India. In a way, the banking sector is one of the most prominent job creating sectors. Also the strength of an economy is an extension of how efficiently banks function. The services offered by banks are charged at 14.5 percent. But experts suggest that once the GST takes full effect, the services will become costlier as the standard rate of various services will rise to 17 to 18 percent. Some are even citing it to go as far as 18-20 percent.

There are various services in the banking sector that are currently service tax free. These mostly include services like payable interests, savings accounts and loans disbursed. All these are likely to incur GST unless there is a special provision to exempt them. Also there are various schemes of the government aimed at the weaker sections of the society. These services are often tax free. But once the GST comes into play, these services are likely to get costlier. The other downside of the increased rate on input services is that operating expenses will go higher as well. By operational cost we mean: rents, legal professional fee, advertisement and all other paraphernalia.

GST is also expected to increase the burden on financial services as financial services may need to adhere to charges varying across states instead of the current system of centralized registration compliances. There has been some doubt in the financial sector over another issue. GST is a destination based tax and thus it can be a little arduous to decide upon the destination of the services. This may lead to a situation where it will be a little complicated to determine the state GST, central GST or inter-state GST. Current system requires that the services are taxed where the services are rendered.

Since the economic reform has just been passed by the parliament and there is a long way to go before it accepted and adopted, there is an ambiguity over how it will impact certain sections of the banking sector. Trading in securities, foreign exchange, interest on loans and are expected to be covered under GST. However, there have been suggestions from the industry asking these services to be exempted from GST. But these are initial days and it remains to be seen whether the authorities pay heed to these recommendations or not.

From outside, banking seems to be one of those sectors which might not get as much favour as some of the other sectors are expected to get from GST but there are some positives as well. As expected, GST will curb tax evasion and will check the parallel economy thus widening the tax base. This will lead to demand for extra funds and ensure more accounted transactions. There are many facets of debate on GST and its impact on the banking sector and it is a tad difficult to assume a clear picture at the current moment but the opacity is expected to fade out once the model is adopted. However, one thing is certain, it may or may not turn out to be fruitful for the banking sector, its implementation will certainly be a watershed moment in the history of banking in India channeling a new course altogether.


Banking Sector and GST