GST NBFC

Applicability and Effects of GST on NBFCs in India

Introduction

In the history of India’s tax system, the introduction of the Goods and Services Tax, or GST, has been a significant turning point. A more complete and standard system has been put in place for businesses with the introduction of GST, which replaces the previous indirect tax model that was used in the nation and enables them to better manage their tax obligations. Non-Banking Financial Companies have been similarly impacted. This blog provides a thorough study of how GST applies to NBFCs in India, as well as the advantages and difficulties that have resulted from its implementation.

Meaning of Goods and Services Tax (GST)

The new indirect tax, known as the “Goods and Services Tax,” went into effect on July 1, 2017. A destination-based tax known as GST replaced the several indirect taxes that had previously been in place in India. Every stage of the sale of products or provision of services is subject to GST, which necessitates that each responsible business apply for GST Registration and submit monthly, quarterly, and annual GST returns.

The tax under GST is divided into three categories: Central GST (CGST), State GST (SGST), or Union Territory (UTGST), and Integrated GST (IGST). On various goods and services, the tax is imposed at rates of 0%, 5%, 12%, 18%, and 28%. GST implementation has produced a number of tax and cost benefits for retailers, producers, and service providers in addition to consumers. The following list of benefits of GST in India can be summed up:

• Removal of the cascading effect brought on by various indirect taxes.
• Price reductions for a variety of goods and services as a result of tax implications.
• System for electronically filing GST returns without hassle.
• Self-policing tax system.

Effects of GST on NBFCs in India

The tax obligations of NBFCs in India have changed significantly under the GST regime. The majority of the loan services provided by Non-Banking Financial Companies (NBFCs) were previously excluded from indirect taxes under the multiple indirect tax system.

Only up to a certain point was the Centralised Service Tax assessed without taking into account the location from where the services were rendered. However, the new regulations for NBFCs covering the GST rates, registration, Input Tax Credit, and place of service supply were brought about by the shift in the indirect tax regime. In India, the following amendments to the GST apply to NBFCs:

• For services connected to NBFCs, the new GST rate has been raised to 18%.
• Every state in which the NBFC has a branch must register for GST in India.
• Services provided by separate branches of an NBFC across state lines are subject to IGST.
• Each state has filed more GST returns than before.
• Understanding the scope of financial services in India is crucial for comprehending the various impacts of GST on NBFC companies there.

Financial Services Meaning

The following activities are included in financial services provided by non-banking financial companies:

• loaning money
• Hire Purchase / Lease
• Receivables can be assigned or securitized.
• Constrained sales
• Sale or acquisition of securities and shares.

Applicability of GST on Loans In India

According to the definition of goods and services in Section 2 of the CGST Act¹. As a result, in India, NBFC and bank loan transactions are likewise exempt from GST. In accordance with Entry 8 of the Schedule of GST rates provided by the Indian GST Council, the same has also been exempted in the form of money-to-money transactions. It says that the following services won’t be subject to the GST:

• A deposit, loan, or advance is extended if the consideration is represented by interest or a discount (other than interest related to credit card services).
• The exchange of foreign currency across state lines between banks, authorised dealers in foreign exchange, or between banks and these dealers.

This also implies that any interest fees levied by NBFCs in connection with loan transactions are exempt from GST. ‘Interest’ is defined as any amount payable in relation to any amount borrowed or debt incurred (including a deposit, claim, or other similar right or obligation) in Clause 2(zk) of Notification No. 12/2017 Central Tax (Rate) dated June 28, 2017, but excludes any service fee or other charge in relation to the money borrowed or debt incurred or in relation to any credit facility that has not been used.

However, there are some revenues that an NBFC receives in India that are liable to GST. The following are examples of GST-exempt and -chargeable incomes received by NBFCs:

Location of Supply: The location from which the financial services are delivered by the NBFC must be the location from which the services are received, and the same must be documented in the company’s records, according to the GST system in India.

The IGST Act’s Section 12(12) makes provision for the same. The provision further stipulates that the supplier’s location will be taken into account as the place of supply if the location where the services are received is not listed on the supplier of services’ records.

Input Tax Credit for NBFCs In India

The definition of an input tax credit, or ITC, is a credit that a business can claim on the tax that must be paid on any purchases it makes. The credit can also be used to lower the tax burden a firm faces on sales it makes within a specific time period.

A person who has registered for GST must fulfil a number of requirements in order to obtain Input Tax Credit. These consist of:

• The tax invoice, debit note, or other proof that the tax was paid by the GST holder is in their possession.
• Any products, services or both have been received by the owner of the GST registration.
• The provider of these goods or services has already paid GST with regard to these supplies.

The CGST Act’s Section 39 requires the GST holder to file a return.

Prior to the implementation of the GST, non-banking financial companies could only take use of the 50% input tax credit option. NBFCs had the option of receiving a 100% credit for excise taxes paid on capital items against their service tax obligation.

The new system allows NBFCs to claim an input tax credit for inbound supplies at a fixed rate of 50% of all credits on inputs, capital goods, and input services that are eligible under the GST regulations.

Furthermore, an NBFC that is involved in the provision of services in the form of loans or deposits is not qualified to claim an input tax credit for any inputs or input services that have not been applied to its business needs. This means that ITC cannot be claimed for non-eligible inputs like the GST that the NBFC paid on travel, food, drinks, and other expenses.

Under India’s GST system, an NBFC may make an Input Tax Credit (ITC) claim in one of two ways:

Section 17(2) Proportional Input Tax Credit Method

The amount of input tax credit that a non-banking financial company can claim is limited to the input tax that is attributable only to the taxable supplies, including zero-rated supplies, according to Section 17(2) of the CGST Act when the NBFC uses any inputs, input supplies, or capital goods that are partly taxable supplies (including zero-rated supplies) and partly the supplies that are exempt under the CGST Act or IGST Act.

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

A Non-Banking Financial Company may claim Input Tax Credit on its inputs, input services, or capital goods at a set rate of 50% on all of its credit under the 50% ITC method, after which the remaining Input Tax Credit will expire. Whether or not the inputs were used to make taxable supplies is not taken into account by this procedure. Additionally, Section 17(4) says that once an option has been exercised, it cannot be withdrawn within the same fiscal year.

The rule further provides that the tax paid on supplies made by one registered person to another registered person possessing the same Permanent Account Number (PAN) in India would not be subject to the same restrictions. This means that the 50% Input Tax Credit will not be eligible for the supplies made if the NBFC has another GST registration under the same business.

Which ITC Method is more suitable for NBFCs?

The 50% Input Tax Credit Method under Section 17(4) is found to be the most appropriate for Non-Banking Financial Companies when the two available methods of Input Tax Credit are compared, as it allows them to claim a flat 50% input credit instead of a limited Input Tax Credit that is attributable only to its taxable supplies, including zero-rated supplies. The 50% ITC method is also appropriate for NBFCs that conduct business on a larger scale and handle numerous transactions each day. It is simpler for an NBFC to calculate bulk transactions connected to a loan lifecycle when there is a set rate for claiming input tax credit.

Benefits of GST Applicability on NBFCs in India

The functioning of NBFCs in India has been both benefited by and challenged by GST, as can be seen after comprehending the various effects of GST on NBFCs in India. Following are some of the many advantages of applying GST on non-banking financial companies:

• All of the many indirect taxes, including State VAT, State Cess, Purchase Tax, Excise Duty, Service Tax, Sales Tax, Entertainment Tax, etc., have been integrated into the Goods and Services Tax. This has resulted in the abolition of the cascading impact of taxes, whereby tax was occasionally put on top of tax and significantly increased the cost of goods and services.
• Because the GST system is supported by technology, NBFCs with hybrid or tech-based business models may simply manage their tax filings. NBFCs can make sure that their GST return filing and other compliances are followed to without any difficulties because GST governance is built on digital compliance and return filing.
• Under the GST system, only lending companies with an annual revenue of INR 20 lakhs are required to register for GST in India. This enables lending companies that operate on a small scale, such as Micro-Finance Institutions (NBFC-MFIs), to get an exemption from obtaining the tax registration and significantly lower their operational costs.
• These institutions operate in a single state and have an annual turnover of less than INR 20 lakhs. It should be noted that the barrier for GST registration has been lifted to INR 40 lakhs for firms that are engaged in the production of products rather than the previous cap of INR 20 lakhs for enterprises that provide services.

Challenges Posed By GST before NBFCs in India

Financial companies have benefited greatly from the impact of GST on NBFCs in India, but there are also some difficulties that have been placed in their path. These difficulties include:

• Multiple GST Registrations: NBFCs only needed a single central registration to conduct business in India under the previous indirect tax system. However, under the current system, NBFCs must now register for GST in India for each branch through which they conduct their lending business in several states. Various GST Return Filing Requirements: Due to various registrations, the GST system has also significantly increased the number of compliances and GST return filings for NBFCs. The various compliances also demand a lot of billing and transaction data in order to show proof of tax due.
• Confusion between account-linked financial services and non-account-linked financial services: As the majority of NBFCs move towards digital operations and expand their service areas to include all of India, it can be difficult to keep track of the location of supply in records. Establishing the location of supply may be challenging when one NBFC operates from many locations in various states. When it comes to Non-Account Linked Financial Services, NBFCs with many offices in various states and one office in another area may make it difficult to determine the location of supply.
• Increased Invoice Requirements: Section 25 of the CGST Act mandates that businesses transmit all of their invoices when submitting their various GST returns. For all transactions involving loan application processes, commissions, late payment fees, all inputs, input services, and capital goods, an NBFC must keep track of them and produce invoices. The NBFC must also make sure the information is accurate and electronically upload the paperwork. For an NBFC that operates on a large scale and handles numerous loan applications each day, this might be a challenging undertaking.
• Carry-Forward of Other Duties: In the event that other duties, such as the Krishi Kalyan Cess and Secondary and Higher Education Cess, are carried forward, the NBFC’s cash flow may be negatively impacted if the company is subjected to legal action.
• Assessment Difficulty: Since multiple GST Authorities may have jurisdiction over the NBFC in the case of multi-state activities, it would be challenging to decide and evaluate any legal challenges because various authorities may have differing viewpoints on the subject.

Conclusion

The Goods and Services Tax has had a conflicting effect on India’s Non-Banking Financial Companies (NBFCs). The GST system has had a significant impact on how NBFCs operate, how loans are transacted, how they determine their tax burden, how they file tax reports, and how they use information technology to handle their tax compliance responsibilities.

In order to file their GST filings and claim their Input Tax Credit, NBFC businesses in India must now be more diligent with their transactions and records. They must make sure that they have proof of all of their transactions, whether they are inward or outward.

The implementation of GST for NBFCs in India has brought about a number of advantages as well as difficulties for the lending industry. However, a GST regime that is truly advantageous and makes tax compliance simpler for these financial enterprises has not yet been reached. It would be reasonable to anticipate further modifications to the GST’s applicability to NBFCs in the future, lowering the tax burdens on Non-Banking Financial Companies in India, as the government supports the NBFC industry and works to promote financial inclusion.

FAQ

Changes in Utilization of Input Tax Credit under the GST Act.

Impact of GST on Banks and NBFCs.

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1. https://cbic-gst.gov.in/gst-acts.html