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Money matters

Impact of GST on Banking Services | YES BANK | Life Matters

After about a decade of extensive planning and careful crafting, came the historic declaration of introducing Goods and Services Tax (GST), replacing a multitude of central as well as statewide taxes. In common parlance, GST is a consolidated tax — centre and state levying taxes on a payer. The 1st of July, 2017 would break the seven decade long lacunae, delivering a complete overhaul of the Indian Taxation System. Under the previous tax system, direct and indirect taxes levied on goods and services fell between 25% and 40%, which have now been restructured between 5% and 28% for around 1200 goods and services.

There are some components; including commonly used consumables like milk, eggs, fruit, vegetables, meat, fish and chicken, legal documents (such as stamps, stamp papers and other utilities like printed books and newspapers); which have received complete GST exemption sale. On the other hand, several other services have witnessed a hike as compared to the collective taxes implied before enforcing GST. In a surprising turn of events, various services offered by the Banking and Finance sector are expected to fall under the latter associated with this new tax regime. Categorising these services, which were earlier taxed at 15%, along with telecom & IT and other such semi-essential goods, such as preserved foods, mineral water and notebooks, financial transactions, will now fall under 18% GST. This hike of 3% means an increment of INR 3 on every INR 100 spent on financial transactions. However, it is important to note that this increment does not directly affect services related to commodities, such as gold and silver on which a concessional GST rate would be applicable.

This increment would not directly affect financial organisations since the operational cost would indirectly be remitted by organisations with a larger transaction flow. In this case, individuals would bear the burden of paying a little more to avail these services. Such a massive operational change would demand an intensive resource up-scaling, including training employees to be aware of the changes and rethinking their policy structure. It would be a daunting task, to say the least. A platter of concerns covers finance sectors’ platform, enforcing them to be well-equipped to deal with them.

Branch Registration A New Hassle

A painstaking one-time process that is now inevitable, contrary to a centralised registration of the Indian banks under the former tax regime reforms, demand a state-wise registration of all bank branches. This would considerably increase the initial workload as well as expenditure. Instead of two returns to be filed as a service tax assesse, given the nation-wide reach, most banks would now end up filing more than 60 monthly and annual returns, collectively.

This transformation directly authorises state regulators, with which the branch holds its registration, to conduct assessments regarding the branch’s utilisation of GST. In addition to this, transactions between branches would also be considered taxable under this context. This means that a transaction between two branches of the same bank registered under different states would be taxed as the location of the supplied services changes. Technically, this ‘self-service’ tax would be difficult to track considering the volume of transactions that are carried out on a daily basis. Such complexity proves to be extremely difficult to overcome as banks continue appealing for amends in the current framework.

Let the Chase Begin

GST provides an important functional control as banks get to decide whether a transaction would fall under Central GST (CGST), State GST (SGST) or Integrated GST (IGST) bracket. This revamped registration compliance compels financial institutions to pinpoint the origin of operations for both individual and commercial consumers of financial services. For individuals, the registration for their banking and financial needs would be done at the state level where they are currently residing. It is difficult to manage these accounts knowing how commonly individuals change their state of residence while seeking better career opportunities.

Similarly, to ascertain a centralised location (state) of operations for an organisation providing services or products pan-India is an almost impossible task. This raises an array of concerns with respect to the operational compliance of financial organisations with multiple state authorities. Restructuring and maintaining the records of millions of individuals and organisations pose a challenge that would require careful planning in order to be executed to fruition.

It is a Long Road Ahead

Awaiting implementation, the Indian financial sector is in a fix regarding the renewed transaction handling, registration compliance, operations, and information systems, since GST implementation demands restructuring these components in their entirety.

All laid out straight, the implementation of GST will surely change the functioning of the Indian tax regime, especially for its financial institutions.

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