The Banking sector plays an important role in generating revenue in our economy. It also plays an important role in the financial life of a business. Although no wealth is created by banks and Financial Institutions, it helps in the process of exchange and distribution of wealth. Any changes made in this sector will bring corresponding changes in the development of business and industries which are dependent on financial and non-financial services provided by banking sectors.

One of the biggest transformations that the banking sector faced is after the implementation of GST (Goods and Service Tax) in India.

GST is a new tax regime which was introduced in 2017. It is applicable across India, which has replaced multiple taxes imposed by the central and the state government on goods and services. Basically, it is a replacement to the Value Added Tax (VAT) which was imposed on goods and services. The main objective of the GST was to avoid the double taxation on goods and services.

Effect of GST on Banking Sector

• No more centralized registration
  Before GST, banks with pan-India operations could discharge their service tax compliance through a single centralized registration. However, under GST, such banks will have to register themselves separately for each state. This puts an additional burden on the banks to comply with the filing of returns.
  
  
• Assessment and Adjudication became difficult
  Under GST, the assessment has to be done by the respective state regulators under which the concerned branch is registered. This means that more than one adjudicating authority will be involved and there may be different opinions on the same underlying issue. This contraction can prolong the process of adjudication.
  
  
• Actionable Claims
  Prior to GST, actionable claims were not included as a service under Service Tax. However, Under GST actionable claims are included in the definition of supply of goods.
  
  
• Place of Supply of Goods and Services
  As per section 12(2) of the IGST Act, 2017, in the case of banking and other financial services, the place of supply shall be the 'location of the recipient of service' on the records of supplier of services. And if the recipient's location is not available in the records of the supplier, then the place of supply shall be the location of the supplier.
  
  
• Inter-branch GST implications
  Prior to GST, banks were not subject to any tax for interstate transactions between two branches of the same bank. However, under GST, the same is levied on transactions between two interstate branches of a bank.
  
  
• Invoice requirements
  As per rule 47 of the CGST Rules, 2017, the banking companies are required to issue tax invoices to the customers within 45 days from the date of supply of Banking services. However, Rule 54(2) of the CGST Rules, 2017 prescribes that such tax invoice can be replaced by any other document in lieu of invoice, including consolidated statement, advice, invoice, etc generated at the end of the month.

Index Tax Credits (ITC) on Banking services
Under GST, a banking company or a financial institution engaged in the supply of services through acceptance of deposits, granting loans or giving advances are allowed to claim ITC under Section 17(4) of CGST Act, 2017.

ITC can be availed by the following methods:

• Reverse credits related to exempt services as provided under Section 17(2) of the CGST Act, 2017.
• Availing 50% of the eligible ITC on inputs, capital goods and input services for the month, and the rest of the ITC will be lapsed.

As per rule 38 of CGST Rules, 2017, there are certain conditions for availing ITC on banking services:
A banking or financial company may claim ITC only on:

1. Taxes paid on inputs and input services which are used for business purposes.
2. ITC cannot be claimed on account of supplies referred to in Section 17(5) of the CGST Act, 2017

The condition of 50% restriction on availing ITC is not applicable in case of tax paid on supplies made by one registered person to another registered person holding the same PAN, i.e., interstate transactions between branches of the same bank.

50% of the balance amount of ITC is admissible and to be furnished in Form GSTR-2.

GST is charged on all banking activities
Prior to GST, services offered by Banking companies were subject to 15% Service Tax. However, under GST it has now risen to 18%. With the enhanced tax burdens, the final customers of such Banking companies have to bear the additional charges associated with Banking services such as:

• Transaction Charges
  Transaction charges are the charges which we pay to the bank when we withdraw cash from an ATM. it was increased to 18% from 15%. With respect to cheque book services, the first 10 cheques will be free of cost in a financial year. Thereafter, 18% taxes will be applied to each cheque.
   
• Loans
  Under GST, the loans are taxable at 18%. The home loans which were available to the borrowers for a VAT of 5% for construction materials and 3.5% service tax, are now available at 18% which will be little more expensive for the borrowers.
   
• Other services
  Banking facilities like locker facilities, tax payment, billing, and shopping etc. which are offered by the banking sector are taxable for 18% under GST which is 3% higher than the early tax rates.

Exemptions from GST:
Few banking services are exempted by the Central Government they are as follow:

1. Services provided by the Reserve Bank of India.
2. Service of providing deposits, loans or advances where the consideration is in the form of interest or discount, excluding interest involved in credit card services.
3. Service of inter se sale or purchase of foreign currency amongst banks or authorized dealers of foreign exchange, or amongst banks and such dealers.
4. Service provided by a business facilitator or a business correspondent to a Banking company or Insurance company for its accounts in a rural area branch.
5. Services provided by a banking company to Basic Saving Bank Deposit under Pradhan Mantri Jan Dhan Yojana.
6. Services by the acquiring bank to any person for transfer of amount up to Rs. 2,000 in a single transaction done through credit card, debit card, or other payment card service.
7. Services under Atal Pension Yojana.
8. Services under any Pension Scheme of State Governments.
9. Services provided by Central Government, State Government or Union Territory for any insurance for which total premium is paid by the Government.

Impact on customer:

1. Under GST, the tax rate on each and every product and service of the banks have become expensive and less affordable to the customers.
2. The tax charged on Debit and Credit card is 18% which is costlier than the previous rate which was 15%.
3. Under GST, the rate of loans has been increased to 18% which puts the customers in pressure and uncertainty whether the customer will be able to repay the amount.
4. The tax on investments like mutual funds are increased to 18% which is very much higher for the customers to afford.
5. Increase in the premium caused a large number of the customers to withdraw the insurance policy. People with low income cannot afford the premium charged under GST.

Conclusion
After the implementation of the GST in India, it was predicted that the Indian economy would be transformed, as it aimed to help the firms to increase their overall efficiency by simplifying the tax compliances.

However, the impact of GST is straightforward with a hike of 3% on Indirect Tax imposed on Banking services. Banking companies also face the additional hurdle of requiring to separately register in each state they operate in, which further enhances their compliance load.

Thus, the GST on the Banking sector has not yet proven favourable to the Indian economy or to their final customers. It is for the GST Council and the Central Government to take into account the detrimental impact of such enhanced rates of GST on the Indian economy at large.

Reference:

• http://ijcms2015.co/file/2018-vol-III-issue-III/aijra-vol-iii-issue-3-6.pdf
• https://amlegals.com/gst-implications-on-banking-and-insurance-sector/