Key GST Implications and Challenges in Banking Sector

GST Implications and Challenges in Banking Sector

GST has impacted every other business sector in India, including the service sector. Banking is one of the biggest service sectors in this country. The financial services sector, especially financial services based on funds and insurances, are most affected by GST. In this article, we will discuss the key GST implications and challenges in the banking sector.

An Overview on GST

Goods and Services Tax, popularly called GST, is applicable on the supply of goods and services. It has replaced the taxes like excise, VAT, and service tax. The main objective behind GST implementation is to bring uniform taxation in the country and allow full tax credit from input and capital goods procurement.  It was implemented with a view to eliminate the cascading effect of production and distribution cost of goods and services.

GST Implications and Challenges on Banking Sector

Some of the GST implications and challenges on banks are as follows:

Increase in Compliance

Almost every bank has a multi state presence, and under GST, they are required to pay taxes at the state and central level therefore, banks are required to get registration of for every state where they function. In order to maintain this, they require separate books for every branch to create proper control over their usage. This has led to an increase in compliance levels. Therefore increase in compliance is one of the major GST implications and challenges.

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Along with the burden of GST compliance, return filing has expanded liberally where the periodicity of returns and number of return formats are concerned.

Input tax credit leveraged and de-leveraged

Banks and NBFCs opted for reversal of 50% credit under the CENVAT credit against inputs and input services, and CENVAT credit has no reverse condition on capital goods. Banks and NBFCs under GST can avail 50% credit under the CENVAT credit against inputs and input services. Capital goods are reversed, which reduces credit of 50% on capital goods because of which the capital cost went up.

Assessment and Adjudication

All banks are required to register for all office locations. With an increase in accounting and other procedures, most of them might face major GST implications and challenges that can complicate the payment of taxes under GST. All vital assessments would be done under which the respective banks are registered and they are required to justify using the input tax credit for the respective state. The imminent authority under GST would increase and may create some trouble as they have some differences or a new approach for similar old issues.

Revenue recognition under GST

Banks and NBFCs may face issues related to revenue recognition as the majority of their services are related to the different sectors and segments. 

Financial Services related to account

In the digitalization era, professionals, businessmen, and others can get different types of services anywhere across the country, and there is a possibility that they may move to a new location. This can cause hardship due to different address. On the other hand, branches provide different types of services relating to payment and other goods, within the state and outside the state, to determine the place where these services are provided would be a tough deal.

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Financial Services not related to account

Providing financial services to people who are running a business from a remote location and managing a bank account from different location may cause GST implications and challenges because the location of the service provider is different from the location of the operator.

Actionable claims

Actionable claims don’t set up as a service under the service tax[1] therefore, no tax was payable under the old system. Under GST, actionable claims are included in the definition of supply of goods. Services provided from bills discounted to securitization shall be taxed.

Transactions affected by GST

Loans provided by banks and NBFCs are not affected because these are money to money transactions. Therefore no GST on loans and interest charged on loans.

In banks or NBFCs, lease may be either supply of goods or supply of services both attracts GST charges that is similar to services and goods that is being leased.

Hire purchase is a process where the buyer of an asset pays regular instalments and takes asset possession from the beginning of the agreement, but the ownership is transferred only when all instalment are paid. In this, cost price and leasing charges are applicable to GST.

Benefits to Banking Industry

The benefits to the banking industry are as follows:

  • Banks would be able to set off their GST obligations against credit received on goods purchase.
  • Under the CENVAT system, banks were qualified to take partial credit of excise duty and service tax paid on procurement of qualifying goods and services which is used for provision of output service, but under GST, banks will take input tax credit, which shall be used by banks for payment of output liability.
  •  Banks don’t receive input tax credit of state VAT paid on any goods procured by them as all of the indirect taxes is included in GST, banks would be able to take credit of GST paid on purchasing of goods also.
  • GST may lead to minimizing tax evasion. Carrying on business would be easier, and the increase in business may lead to additional demand of fund, which in turn lead to increase in transactions in the bank as the business and present developments go for digital transactions.
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Positive impact of GST also includes self regulatory taxation system with transparency, uniform taxation rate, and it can increase the number of online banking. In contrast, the GST implications and challenges would include costlier banking for customers etc.  


It can be concluded that the cost of financial transactions could be higher for end customers. Banks would have higher compliance cost because of bank branches registration and inter branch services. The GST implications and challenges in the banking sector will be such that operations, transactions, accounting, and compliance will have to be reconsidered in its totality.

Read our article:Impact of GST on Banks and NBFCs

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