The implementation of GST in the service sector has paused multiple challenges and the industry players have been struggling to find answers for many of the concern areas. The sector, apart from a general increase in rate of 3%, has been grappling with rigours associated with solving issues on place of registration, valuation, place of supply, taxability, etc.
The government has time and again came out with clarifications on various aspects through its Twitter handle and has also issued notifications to provide relief to the industry. In line with its intention, the government has recently issued detailed FAQ’s on Banking, Insurance and Stock Brokers Sector covering some of the specific issues.
The FAQ has provided clarity on many aspects like valuation in case of free service, transactions between related persons, securitisation transaction, etc. However, on few fronts, it raises certain questions which needs to be resolved. We discuss below certain key clarifications.
Location of service provider and place of supply
The FAQ has clarified that the ‘Account Branch’ or the ‘Home Branch’ which holds the contractual relationship with the customer shall be the location of the service provider. Hence, in case of multiple branches are involved in provision of the service, the ‘Home Branch’ would be considered as the service provider to the customer and the other branches are providing services to the ‘Home Branch’. Further, the FAQ also mentions that place of supply shall be the communication address of the customer and in case GSTIN is provided by the customer, the banks can rely on the GSTIN of the customer.
BDO Comments: The clarification on the ‘Home Branch’ concept indicates to the policy framer’s favourable approach towards decentralised registration/billing. Though largely the industry has adopted the ‘Home Branch’ stand, this could be a challenge for certain players where the contractual relationship is only with the HO.
Transactions between related or distinct person
One of the most pertinent aspect covered in the FAQ is in relation to the transactions between ‘related person’ or branches or HO & branch. The FAQ has clarified the following:
- ISD vs. Cross-charge: In respect of the services procured centrally from third parties which are used for furtherance of business in multiple States, the ITC needs to be appropriately invoiced or distributed between the relevant branches by ISD mechanism.
- Value of service: In case of supply between distinct persons, the value as declared in the invoice shall be deemed to be ‘Open Market Value’, wherever the recipient is eligible for full ITC.
- Input tax credit: The recipient branch is not required to pay the value of supply between distinct person for availment of credit. Further, in case of import of services from HO located abroad, entire ITC cannot be claimed, since the foreign HO and the Indian branch does not have the same PAN.
- Time of supply: Time of supply for discharging GST for management oversight service availed from ‘Related person (a Branch or an office) shall be the date of determination of costs or the date of certificate issued by the related person (may be backed-up by a Chartered/Cost Accountant certificate). Further, the clarification states that such cost determination should be done before the expiry of the quarter.
BDO Comments: The FAQ points to the view of the tax payers that ISD is not mandatory and a cross-charge option also be considered for cost allocation. Further, the much-needed clarity on the time of supply in case of HO expenses should provide a favourable climate for the industry.
Value of service
The clarifications in respect of enhancement/addition/deduction to value of services are summarised below:
- Free services or services at concessional rate: The government has clarified that free supplies to unrelated recipient does not qualify as a ‘supply’ and hence not liable to GST. Further, in case of concessional rates provided to unrelated persons, there is no requirement for enhancing the value of services.
- Interest on default in instalment payment: It has been clarified that interest charged for default in payment of instalment, in respect of any GST suffered supply, will be included in the value of such supply.
- Interest on finance lease: A finance lease is neither purely in the nature of extending loans nor is the consideration purely in the nature of interest. Thus, in contrast to the interest on loans exemption, interest on finance lease transactions would be taxable under GST.
- Bad debts: GST paid on bad debts is refundable only on account of specific reasons such as deficiency in supply of services or tax charged being greater than actual tax liability or goods returned. GST paid on bad debts in the common trade parlance cannot be adjusted or refunded.
BDO Comments: The government recently has issued several notices under the service tax regime to the banks seeking tax on free/concessional value of services rendered. However, this clarification even though under the GST law, is expected to support tax payers positioning under erstwhile service tax law also. Further, it is pertinent to note that the taxability of interest would be based on the nature of the principal supply.
Treatment of derivatives, forward contracts and future contracts
The FAQ clarifies that ‘derivatives’ are ‘securities’ and hence not liable to GST. Further, it also states that ‘forward contracts’ and ‘future contracts’ are in nature of ‘derivatives’ and hence not liable to GST.
However, GST will be applicable on service charges, documentation fees, brokerage, etc. charged in respect of ‘derivatives’. GST will also be applicable on the supply of underlying asset in case of forward contract or future contract (i.e. when the settlement takes place by way of actual delivery of underlying asset).
BDO Comments: The clarification ratifies the position adopted by the industry in general.
Sale/assignment of debts or securitisation transaction
In respect of sale/assignment of debts, the government has clarified that:
- Sale/assignment of unsecured debts would come under the purview of ‘actionable claims’
- Sale/assignment of secured debts would be considered as a ‘derivative’ and hence a ‘security’
- Securitised asset is in nature of ‘securities’
Hence, GST shall not be applicable on the aforesaid transactions. However, GST will be applicable on service charges, documentation fees, brokerage, etc. charged in respect of such transactions.
BDO Comments: The industry in line with the above view, appear to have not paid GST on such transactions of the past. However, the argument generally has been on the basis that they are transactions in money, which falls outside the scope of ‘goods’ and ‘services’.
The critical standpoints clarified in respect of GST compliances are as under:
- Banks are not required to obtain registration for the ATMs locations, since it does not constitute place of business for banks.
- The option of 50% reversal is qua each registration and hence a bank obtaining separate registration for ‘business vertical’ dealing with bullion, can escape the 50% ITC restriction.
- A transaction once reported as B2C cannot be amended subsequently to be reported as B2B transaction.
- In case of digitally signed invoice, there is no requirement to issue an ‘original’ and ‘duplicate’ invoice.
- Bill of Supply or document in lieu thereof is required to be issued for exempt services.
BDO Comments: The clarification in respect of ATM, 50% ITC qua each registration and no requirement of duplicate digital invoice, provides a much-needed clarity. In respect of B2C to B2B reporting, from a practical perspective, the companies were seeking to adjust it vide a credit note. The FAQ has not provided any solution to this issue and has only barred from conversion. A solution in this regard would have alleviated hardship caused to the industry.
Miscellaneous (Other clarifications)
- In case of CBLO transactions, amount paid by the borrowing bank to the lending bank for funds provided by it would be in nature of ‘consideration represented by way of interest or discount’ and hence not liable to GST. However, GST will be applicable on any charges, fees, etc. levied for such transactions.
- In case of charges levied by Overseas Correspondent Banks facilitating trade and other cross border transactions, the liability to discharge GST will be on Indian banks on the supply made by overseas correspondent banks to the banks in India.
- GST will be applicable on sale of re-possessed assets.
Location of service provider
The FAQ clarified that the location of supplier in case of service for fund management charges in ULIP policies is the office/location of Fund management team which manages the fund.
BDO Comments: The FAQ has only clarified the case of ULIP policy; however, the location of service provider in case of other type of insurance policies stands unaddressed. Further, can this clarification which gives an indirect affirmation to centralised billing for ULIP policies, be applicable for other insurance products sold by such companies?
Place of supply
It has been clarified that the place of supply in case of master/group policy shall be the location of registered person paying the premium.
BDO Comments: This vindicates the position adopted by the insurance companies.
Time of supply
The FAQ clarified that the time of supply for insurance policy will be:
- New policy – Date of issuance of the policy
- Renewal policy – Date of issuance of renewal notice
- Other charges, including ULIP charges – At the time of levy or recovery of such charges
BDO Comments: In case of renewal policy, since ordinarily a grace period of 15 days to 30 days is allowed, the industry was deliberating whether GST would be applicable only at the time of confirmation/issuance of renewal policy. With this clarification, it may lead to additional credit note compliances, as the renewal notice may not convert to actual issuance of policy.
Input tax credit
It is clarified that insurance company will be eligible for credit on motor garage services used by insurance company for claim settlement. Further, it is mentioned that input tax credit of KKC cannot be carried forward.
BDO Comments: Challenges associated with transition of KKC credit has been under debate, especially for service sector. The government’s intention of not allowing credit of KKC has been clarified through above FAQ as well as through various replies on its Twitter handle. However, the industry position/view is divided. It is argued by a section that KKC forms part of the definition of the term ‘CENVAT credit’ and hence transition of KKC into GST is permissible.
STOCK BROKING SECTOR
Value of service
It has been clarified that the recovery of stamp duty or securities transaction tax or other central or state taxes will not be included in the valuation, if the conditions of ‘pure agent’ are satisfied. Further, any interest /delayed payment charges collected for delay in payment of brokerage amount/ settlement obligations /margin trading facility shall be leviable to GST.
BDO Comments: The broking sector has been of the view that stamp duty and STT shall not be liable to GST as the transaction would satisfy the conditions as applicable to ‘pure agent’.
- A sub-broker would fall within the definition of ‘agent’ and hence would be liable to obtain registration under GST.
- A stock broker is not required to obtain registration at the premises of the sub-broker, since it does not constitute place of business for the stock broker.
BDO Comments: The clarification in respect of registration at the sub-brokers if the premises are neither owned by the stock broker nor rented/ leased in favour of the stock broker and there are no employees on the payroll of the stock broker.
MUTUAL FUND SECTOR
It is clarified that GST shall be applicable on exit load charged on mutual funds.
BDO Comments: The industry in the service tax era, had taken a divided stand and in some cases the tax was paid ‘under protest’. With this clarification, the government has made its intent clear and it is likely that this might be relied-upon by the Service tax authorities for the past periods.
Now that the Government has come-up with much sought-after clarifications, it is important to evaluate the impact/deviations/positions adopted by the industry so far. The deviations may invite possible changes in the operational methodology to contain litigation and financial impact. The concept of ‘Home Branch’ promotes the ideology of decentralised billing, while few players have already implemented the centralised billing model. In such cases, a company will have to either realign with the thinking as amplified in the FAQ or it may still choose to continue in the existing method. All such aspects need to be analysed and a well-informed decision needs to be taken.