Goods and Services Tax (GST)

Goods and Services Tax (GST) is a proposed system of

indirect taxation in India merging most of the existing taxes
into single system of taxation.
"Goods and Services Tax" would be a comprehensive indirect
tax on manufacture, sale and consumption of goods and
services throughout India, to replace taxes levied by the
central and state governments.
Goods and Services Tax would be levied and collected at
each stage of sale or purchase of goods or services based on
the input tax credit method. This method allows GSTregistered businesses to claim tax credit to the value of GST
they paid on purchase of goods or services as part of their
normal commercial activity
From the consumer point of view, the biggest advantage
would be in terms of a reduction in the overall tax burden on
goods, which is currently estimated at 25%-30%, [2] free
movement of goods from one state to another without
stopping at state borders for hours for payment of state tax
or entry tax and reduction in paperwork to a large extent.
The Constitution (One Hundred Twenty second Amendment)
Bill, 2014 proposes a national Value added Tax to be
implemented in India[7] from 1 April 2017.
What will be the impact of GST on Banking sector?

Tax Rate:
Services offered by banks are taxed at 14.5% currently which under GST regime
are likely to become costlier at standard rate of 17-18%.
One of the major fears that consumers may have is that the interest of loans,
foreign currency, retail services and trading in securities will fall under the scope of
GST and if that happens, the cost for everything will increase fundamentally.
Though banks have put forward their recommendation to not include these in the
ambit of GST, it will be only time which will say if these recommendations will be
accepted or no.
Elimination of cascading effect:
Banks will also be able to set-off their GST liabilities against credit received on
purchase of goods (IT infrastructure and furniture etc.) and resultant savings could
get ultimately passed onto end customer. Through the concept of ISD (Input

service distribution) the accumulated input credit could be transferred and utilized
in cases of locations discharging GST liability are different from location where
inputs are received.
Business Process Change:
Banks provide services to customers who are mobile not only pan-India but
international as well. Ex: Credit cards issued by Bank from central location to a
customer may be swiped anywhere. With advent of net banking the address of
customer in account is not where he necessarily stays and obtains banking services
(Ex: Cheque book, Loans, Statements etc.) A customer having his account in
Bengaluru may during his vacation in J&K transfer funds by mobile/net banking to
somebody in Hyderabad. Determining point of supply for services would add
significantly to compliance costs. Under such circumstance a bank having presence
in only 10-15 states will have to take registration for 37 states/UT.
In case of loans availed by customers, the initial verification is done by outsourced
local agencies, loan processing is done centrally, disbursement done locally,
repayment done by net banking/ECS mandate. Under such circumstance
determining point of supply at each stage is very cumbersome.
Several services by bank to a customer are centralized (Ex: Demat Account, Wealth
Management services, bigger home loans etc.) while several others are localized
(Ex: Savings account, Personal loan, OD etc.). As is evident these complexities add
to compliance costs due to multiple assessments and audits. Clarity on
single/multiple ISD registration for distributing inputs across multiple states is
needed.
As banks deal with a host of vendors, reversal of ITC for services availed from a
blacklisted dealer or dealer who does not discharge his GST liability would lead to
increased costs and necessitate additional efforts in tracking dealer status.
Bank Head office also provides services to branches which may become taxable
under GST. The IT systems of banks need to be upgraded to meet all these
requirements related to multiple registrations, determining point of supply of
services, compliance needs and Input Service distribution.
Complying with the requirements of reverse charge and partial reverse charge
mechanism would add to further compliance costs.

Banks on the other hand will be beneficiaries of this reform since all said and
done, individuals and businesses deal with banks on a regular basis. Though if
the operations are not streamlined and well defined, there might be an
increase in the operational cost which cannot be passed onto the customer.
There will be care required while managing compliances along with a whole
lot of services and also training of internal staff.