GST NBFC

Applicability and Effects of GST on NBFCs in India

The advent of Goods and Services Tax or GST has been a monumental milestone in the history of the tax regime in India. With GST replacing the old indirect tax model that was applicable in the country, a more comprehensive and uniform system has been placed for businesses, allowing them to manage their tax liability more efficiently. The enactment of GST regime in India has also changed the way businesses function, and Non-Banking Financial Companies have been similarly affected due to the multiple changes GST has made to the tax liability on financial services. This blog lays down a detailed analysis of the applicability of GST on NBFCs in India, the benefits of GST implementation and the challenges it has posed for NBFCs.

Meaning of Goods and Services Tax (GST)

GST – Goods and Services Tax is the new indirect tax which was introduced on July 1, 2017. GST is a destination-based tax, which consolidated the various indirect taxes that were previously implemented in India. GST is levied on every step of the sale of goods or extension of services, requiring each liable business to obtain a GST Registration and file their monthly, quarterly, and annual GST returns.

Under GST, the tax is compartmentalised as a Central GST – CGST, State GST – SGST or Union Territory – UTGST and Integrated GST- IGST. The tax is imposed at rates of 0%, 5%, 12%, 18% and 28% on different goods and services. The implementation of GST has led to various tax and cost advantages not only for the consumers, but also the sellers, producers, and service providers. The advantages of GST in India can be summarised in the following points:

• Elimination of Cascading effect caused by different indirect taxes.
• Reduction in prices of various goods and services due to the tax implication reduction.
• Hassle-free electronic GST returns filing system.
• Self-regulating tax regime.

Effects of GST on NBFCs in India

The GST regime has brought an array of changes to the tax liability of NBFCs in India. Previously, under the multiple indirect tax system, lending services extended by Non-Banking Financial Companies (NBFCs) were primarily exempted from indirect taxes.

Centralised Service Tax was levied, only to a certain level without taking into consideration the place where the services were extended from. However, the change in indirect tax regime introduced new provisions for NBFCs regarding the GST rates, registration, Input Tax Credit and place of supply of services. In brief, the changes in GST on NBFCs in India are:

• The new GST rate for services related to NBFCs has been increased to 18%.
• The NBFC is required to obtain GST registration in India in every state in which it has a branch.
• Inter-state supplies of services between the different branches of a NBFC are liable for IGST.
• The number of GST return filing in each state has been increased.

In order to understand the different effects of GST on NBFC companies in India, it is also important to understand the ambit of financial services in India.

Meaning of Financial Services

Financial services, with respect to Non-Banking Financial Companies, involve the following set of activities:

1. Giving loans
2. Lease
3. Hire Purchase
4. Securitization or assignment of receivables
5. Conditional sales
6. Sale or acquisition of securities and shares.

Applicability of GST on Loans in India

As per the definition of goods and services under Section 2 of the CGST Act^[1], money or money transactions are excluded from the ambit of GST. Therefore, loan transactions performed by NBFCs and banks are also not subject to GST in India. The same has also been exempted in the form of money to money transactions under Entry 8 the Schedule of GST rates listed by the Indian GST Council. It states that the following services will not have any GST implication:

1. Extending any deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services)
2. Inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers.

This also means that any interest charged on loan transactions by a NBFC is not subject to GST. Clause 2(zk) of Notification No. 12/2017 Central Tax (Rate) dated June 28, 2017, defines ‘interest’ as any amount which is payable in respect of any amount borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the money borrowed or debt incurred or in respect of any credit facility which has not been utilised.

However, there are certain incomes received by a NBFC that is subject to GST in India. A list of exempted and chargeable incomes under GST which are earned by NBFCs are:

Place of Supply

Under the GST regime in India, the location of supply of services holds high importance; the location from which the financial services are supplied by the NBFC must be the location where the services are received, and the same must be entered in the records of the company. The same has been provided under Section 12(12) of the IGST Act. The provision also states that when the location where the services are received is not on the records of supplier of services, the location of the supplier would be considered as the place of supply.

Input Tax Credit for NBFCs in India

Input Tax Credit or ITC has been defined as the credit a business can claim on the tax required to be paid on any purchase it makes and the same can be used to reduce the tax liability the business incurs on the sales it makes during a certain period.

There are certain mandatory conditions which must be satisfied by a person who holds GST registration in order to claim Input Tax Credit. These include:

1. The GST holder has in their possession- the tax invoice, debit note or any such document that proves that the tax was paid by them.
2. The GST registration holder has received any goods, services or both.
3. The supplier of such goods or services has paid GST in respect to such supplies.
4. The GST holder has filed their return under Section 39 of the CGST Act.

Under the pre-GST era, the Input Tax Credit option to Non-Banking Financial Companies was available at a 50% only on inputs and inputs services. For Capital goods, the option available to NBFCs was to avail 100% credit of excise duties paid against their liability to pay service tax.

Under the new regime, Input tax credit for inward supplies can be availed by a NBFC at a fixed rate of 50% of all the credits on inputs, capital goods and input services that are eligible under the GST provisions.

Additionally, a NBFC which is engaged in supply of services in form of providing loans or accepting deposits is not eligible to avail Input Tax Credit on any inputs or input services which have not been used for its business purposes. This means that ITC cannot be claimed for ineligible inputs such as GST paid by the NBFC on food, beverages, travelling, etc.

There are two methods in which a NBFC can claim Input Tax Credit (ITC) under the GST system in India:

Proportional Input Tax Credit Method under Section 17(2)

Section 17(2) of the CGST Act states that when the NBFC uses any inputs, input supplies or capital goods which are partly taxable supplies (including zero-rated supplies) and partly the supplies which are exempted under the CGST Act or IGST Act, the amount of Input Tax Credit which can be claimed by a Non-Banking Financial Company would be limited to the input tax which is attributable only to the taxable supplies including zero-rated supplies.

50% Input Tax Credit Method under Section 17(4)

Under the 50% ITC method, a Non-Banking Financial Company can claim Input Tax Credit on its inputs, inputs services or capital goods at a fixed rate of 50% on all of its credit, and the rest of the input tax credit would lapse. This method does not take into consideration the fact whether or not the inputs were used for the purpose of taxable supplies. Section 17(4) further states that once the option is exercised, the same cannot be withdrawn during the same financial year.

The provision further states that the same would not be applicable to the tax paid on supplies by one registered person to another registered person holding the same Permanent Account Number (PAN) in India. This means that if the NBFC holds another GST registration within the same entity, the 50% Input Tax Credit will not be applicable for the supplies made.

Which ITC Method is more suitable for NBFCs?

When the two methods of Input Tax Credit available are compared, the 50% Input Tax Credit Method under Section 17(4) is found to be most suitable for Non-Banking Financial Companies since it allows them to claim a flat 50% input credit instead of a limited Input Tax Credit which is attributable only to its taxable supplies including zero-rated supplies. The 50% ITC method is also suitable for NBFCs that operate on a wider scale and process large volumes of transactions every day. A flat rate for claiming Input Tax Credit reduces the complexities for a NBFC that come with calculation of bulk transactions related to a loan lifecycle.

Benefits of GST Applicability on NBFCs in India

After understanding the different effects of GST on NBFCs in India, it can be perceived that GST has both benefitted and challenged the functioning of NBFCs in India. The various benefits of GST application on Non-Banking Financial Companies are as follows:

• GST has removed the Cascading Effect: The Goods and Services Tax has combined all the different indirect taxes such as State VAT, State Cess, Purchase Tax, Excise Duty, Service Tax, Sales Tax, Entertainment Tax, etc. This has led to the removal of cascading effect of taxes where sometimes, tax was applied on tax and increased the cost of products and services substantially.
• Digital Return Filing: The GST system functions on a technology-fuelled framework, which allows NBFCs that operate on a hybrid or tech-based business model to easily manage their tax returns. Since GST governance is based on digital compliance and return filing, NBFCs can ensure that their GST return filing and other compliances are adhered to without any hindrances.
• High Threshold for GST Registration: GST system requires only those lending businesses which have an annual turnover of INR 20 lakhs to apply for GST registration in India. This allows lending businesses operating on small scale, such as Micro-Finance Institutions (NBFC-MFIs) which operate in one state and have an annual turnover of less than INR 20 lakhs to get an exemption from obtaining the tax registration, and reduce their operational costs to a considerable extent. It is to be noted that the threshold for GST registration is capped at an annual turnover of INR 20 lakhs only for businesses engaged in providing services, for businesses engaged in goods, the limit for GST registration has been increased to an annual turnover of INR 40 lakhs.

Challenges Posed by GST Before NBFCs in India

While the impact of GST on NBFCs in India has led to numerous benefits for financial companies, there are also certain challenges which have been posed before them. These challenges include:

• Multiple GST Registrations: Under the old indirect tax regime, NBFCs required only one central registration to operate in India. However, the new regime has made it mandatory for NBFCs to obtain GST registration in India for each branch through which the lending business operates in different states.
• Multiple GST Return Filing Requirements: The GST system has also led to a significant increase in the number of compliances and GST return filings for a NBFC due to multiple registrations. The different compliances also require a high number of invoicing and documentation of transactions in order to present proof for its tax liability.
• Confusion regarding Account Linked Financial Services and Non-Account Linked Financial Services: Since most NBFCs are shifting towards digital operations and providing their services across different states and even PAN-India, maintenance of records regarding the place of supply can become challenging. In case of one NBFC operating from multiple branches in different states, this may lead to difficulty in establishing the place of supply. In case of Non-Account Linked Financial Services, NBFCs operating in different locations and having a single office in another state may also cause confusion in establishing the place of supply.
• Increased Requirements for Invoicing: Under the CGST Act, Section 25 requires a business to upload all its invoices while filing the different GST returns. This requires a NBFC to record and create an invoice for all the transactions it performs relating to loan application processes, commissions, late payment penalty, all inputs, input services, and capital goods. The NBFC is also required to ensure the accuracy of the details and upload the documents electronically. This can be a daunting task for a NBFC which operates on a large scale and processes bulk loan applications every day.
• Carry-Forward of Other Duties: In case of carry-forward of duties of cess such as Krishi Kalyan Cess, Secondary and Higher Education Cess, the NBFC’s Cash Flow may get impacted if the business faces any legal action.
• Difficulty in Assessment: Due to the jurisdiction of more than one GST Authority over the NBFC in case of multi-state operations, it would be difficult to adjudicate and assess any legal disputes since different authorities may hold different opinions in the matter.

Conclusion

The implementation of Goods and Services Tax has had a mixed impact on Non-Banking Financial Companies (NBFCs) in India. The GST regime has substantially affected the manner in which NBFCs operate, the manner of loan transactions, the way they calculate their tax liability, file tax returns, and the Information Technology framework they put in place to manage their tax compliance requirements.

In the post-GST era, NBFC businesses in India need to be more vigilant of their transactions and records in order to ensure that they hold proofs of all their transactions – inwards or outwards, in order to file their GST returns and claim their Input Tax Credit.

The applicability of GST on NBFCs in India has brought multiple benefits as well as challenges for the lending sector, however, a truly beneficial GST regime that makes tax compliance easier for such financial businesses, is yet to be achieved. With the government bolstering the NBFC sector and moving towards financial inclusion, it will not be wrong to expect more changes in the GST applicability on NBFCs in the future that would reduce the tax burdens of Non-Banking Financial Companies in India.