Impact of GST on Banking Sector

Before we dive into the impact of GST i.e. Goods and Services Tax, let’s take a look at what exactly GST is and why has it been introduced.

GST

Goods & Services Tax or GST is a single tax that will be applicable to supply of goods and services from the manufacturers to the end consumers. GST will essentially be charged only on the value addition at each stage, in between the manufacturer and the end user, and the consumers need to bear the GST charged only by the last dealer in the supply chain. With the implementation of GST, the government is expecting to streamline the current scenario of the indirect tax regime which will replace not just the central indirect taxes but also state level indirect taxes.

Impact of GST on the Banking Sector

With the implementation of GST, service sector companies will be impacted more than the manufacturing or trading sector companies. Banking, being one of the largest service sectors in India, will see the impact of GST highly reflected in the sector. Services like insurance, fee-based and fund- based services, will witness a major shift, since the GST rates are higher compared to the current rates, and also due to the fact that banks have wider geographical reach these days.

Impacts

Substantial Increase in Compliance, and Registration hassles: With the implementation of GST, the state and centre need to tax the payer in one go, and for achieving this, banks need to register state wise for all states. But, currently, all banks and NBFCs operate in a centralised fashion, which can create a registration hassle.

In addition to the registration burden, compliance in regards to filing will also increase substantially. Currently, a bank may be filing only 2 returns on an annual basis, which will be increased to around 61 returns per year, for every state in which that bank is present.

Determining the Place of Supply: Banks will have to determine the place of consumption where GST will be applicable since it is based on place of supply regime. Determining the place of supply will be critical, since most of the bank's conduct transactions, both within and outside the state. Now, based on the transaction, banks will have to determine whether the payment should go for Central GST or State GST or the Integrated GST.

Paying GST: At present, banks charge tax at 15%. With the GST, the services are expected to attract 18% tax, which will make banking services like issue of demand drafts and cheque books, expensive, especially to the retail customers. Since concessional GST rate is expected to apply to commodities such as gold/silver, banks need to be extra careful in paying GST, as these attract different rates based on different products.

Interest Taxability: Under the current scheme, service tax legislation does not tax interest. This will change with the implementation of the GST.

With the arrival of GST, there will be a great shift in the banking sector, and all banks, public and private ones, will be affected phenomenally. Banks, such as Vijaya Bank, have already begun to issue notices on revised charges for services that would come into effect once GST is implemented. Click here to see new charges you can expect.